Health Check: How Prudently Does Tiong Seng Holdings (SGX:BFI) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Tiong Seng Holdings Limited (SGX:BFI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tiong Seng Holdings

How Much Debt Does Tiong Seng Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Tiong Seng Holdings had debt of S$86.0m, up from S$63.0m in one year. However, it does have S$54.3m in cash offsetting this, leading to net debt of about S$31.8m.

How Strong Is Tiong Seng Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tiong Seng Holdings had liabilities of S$291.9m due within 12 months and liabilities of S$36.4m due beyond that. Offsetting this, it had S$54.3m in cash and S$119.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$155.0m.

This deficit casts a shadow over the S$53.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tiong Seng Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tiong Seng Holdings will need earnings to service that debt. 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 Tiong Seng Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to S$295m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Tiong Seng Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping S$33m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized S$6.7m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Tiong Seng Holdings (1 shouldn't be ignored!) that you should be aware of before investing here.

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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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.