Is Tycoons Group EnterpriseLtd (TPE:2022) A Risky Investment?

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. Importantly, Tycoons Group Enterprise Co.,Ltd. (TPE:2022) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Tycoons Group EnterpriseLtd

How Much Debt Does Tycoons Group EnterpriseLtd Carry?

As you can see below, at the end of September 2020, Tycoons Group EnterpriseLtd had NT$2.29b of debt, up from NT$2.02b a year ago. Click the image for more detail. On the flip side, it has NT$363.8m in cash leading to net debt of about NT$1.92b.

How Strong Is Tycoons Group EnterpriseLtd's Balance Sheet?

We can see from the most recent balance sheet that Tycoons Group EnterpriseLtd had liabilities of NT$2.79b falling due within a year, and liabilities of NT$350.4m due beyond that. Offsetting these obligations, it had cash of NT$363.8m as well as receivables valued at NT$817.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.96b.

While this might seem like a lot, it is not so bad since Tycoons Group EnterpriseLtd has a market capitalization of NT$3.40b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Tycoons Group EnterpriseLtd'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.

In the last year Tycoons Group EnterpriseLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to NT$9.1b. That makes us nervous, to say the least.

Caveat Emptor

While Tycoons Group EnterpriseLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$45m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$565m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Tycoons Group EnterpriseLtd (2 shouldn't be ignored) 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.

If you decide to trade Tycoons Group EnterpriseLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.