Is Tiong Seng Holdings (SGX:BFI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Tiong Seng Holdings Limited (SGX:BFI) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tiong Seng Holdings

What Is Tiong Seng Holdings's Net Debt?

As you can see below, Tiong Seng Holdings had S$68.2m of debt at December 2020, down from S$98.3m a year prior. However, it also had S$46.8m in cash, and so its net debt is S$21.4m.

How Strong Is Tiong Seng Holdings' Balance Sheet?

The latest balance sheet data shows that Tiong Seng Holdings had liabilities of S$270.7m due within a year, and liabilities of S$35.4m falling due after that. Offsetting this, it had S$46.8m in cash and S$115.7m in receivables that were due within 12 months. So its liabilities total S$143.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the S$70.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Tiong Seng Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Tiong Seng Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Tiong Seng Holdings made a loss at the EBIT level, and saw its revenue drop to S$238m, which is a fall of 42%. To be frank that doesn't bode well.

Caveat Emptor

While Tiong Seng 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 a very considerable S$40m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of S$32m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Tiong Seng Holdings (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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