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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Thomson Medical Group Limited (SGX:A50) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Thomson Medical Group's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Thomson Medical Group had debt of S$610.5m, up from S$575.6m in one year. However, it also had S$107.9m in cash, and so its net debt is S$502.7m.
How Strong Is Thomson Medical Group's Balance Sheet?
According to the last reported balance sheet, Thomson Medical Group had liabilities of S$73.0m due within 12 months, and liabilities of S$627.8m due beyond 12 months. On the other hand, it had cash of S$107.9m and S$21.2m worth of receivables due within a year. So it has liabilities totalling S$571.7m more than its cash and near-term receivables, combined.
Of course, Thomson Medical Group has a market capitalization of S$3.07b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Thomson Medical Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Thomson Medical Group had a loss before interest and tax, and actually shrunk its revenue by 5.5%, to S$217m. We would much prefer see growth.
Importantly, Thomson Medical Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at S$26m. 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. We would feel better if it turned its trailing twelve month loss of S$55m into a profit. So to be blunt we do think it is 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. To that end, you should learn about the 2 warning signs we've spotted with Thomson Medical Group (including 1 which is concerning) .
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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