Is Ta Yang Group Holdings (HKG:1991) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ta Yang Group Holdings Limited (HKG:1991) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ta Yang Group Holdings

What Is Ta Yang Group Holdings's Debt?

As you can see below, Ta Yang Group Holdings had HK$58.9m of debt at June 2021, down from HK$65.9m a year prior. However, because it has a cash reserve of HK$43.6m, its net debt is less, at about HK$15.2m.

How Healthy Is Ta Yang Group Holdings' Balance Sheet?

According to the last reported balance sheet, Ta Yang Group Holdings had liabilities of HK$455.5m due within 12 months, and liabilities of HK$20.8m due beyond 12 months. On the other hand, it had cash of HK$43.6m and HK$73.1m worth of receivables due within a year. So it has liabilities totalling HK$359.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$209.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Ta Yang Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Ta Yang Group Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Ta Yang Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$261m, which is a fall of 45%. To be frank that doesn't bode well.

Caveat Emptor

While Ta Yang Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$68m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$87m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Ta Yang Group Holdings (1 is potentially serious!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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