We Think Transport International Holdings (HKG:62) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Transport International Holdings Limited (HKG:62) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Transport International Holdings

How Much Debt Does Transport International Holdings Carry?

As you can see below, at the end of June 2020, Transport International Holdings had HK$3.32b of debt, up from HK$2.70b a year ago. Click the image for more detail. On the flip side, it has HK$2.05b in cash leading to net debt of about HK$1.28b.

How Strong Is Transport International Holdings's Balance Sheet?

According to the last reported balance sheet, Transport International Holdings had liabilities of HK$2.03b due within 12 months, and liabilities of HK$4.21b due beyond 12 months. Offsetting this, it had HK$2.05b in cash and HK$649.9m in receivables that were due within 12 months. So its liabilities total HK$3.54b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Transport International Holdings is worth HK$6.90b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Transport International 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.

In the last year Transport International Holdings had a loss before interest and tax, and actually shrunk its revenue by 13%, to HK$7.1b. That's not what we would hope to see.

Caveat Emptor

While Transport International 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. Indeed, it lost HK$253m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of HK$317m and the profit of HK$252m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 instance, we've identified 4 warning signs for Transport International Holdings (1 is a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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