Is Tiong Seng Holdings (SGX:BFI) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Tiong Seng Holdings Limited (SGX:BFI) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

How Much Debt Does Tiong Seng Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Tiong Seng Holdings had S$88.4m of debt, an increase on S$78.3m, over one year. However, it does have S$68.1m in cash offsetting this, leading to net debt of about S$20.3m.

How Strong Is Tiong Seng Holdings' Balance Sheet?

The latest balance sheet data shows that Tiong Seng Holdings had liabilities of S$326.0m due within a year, and liabilities of S$41.6m falling due after that. On the other hand, it had cash of S$68.1m and S$112.3m worth of receivables due within a year. So its liabilities total S$187.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the S$41.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Tiong Seng Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tiong Seng 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, Tiong Seng Holdings made a loss at the EBIT level, and saw its revenue drop to S$264m, which is a fall of 16%. We would much prefer see growth.

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. Its EBIT loss was a whopping S$99m. 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 lost S$96m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. Case in point: We've spotted 4 warning signs for Tiong Seng Holdings you should be aware of, and 2 of them make us uncomfortable.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.