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. We can see that Trio-Tech International (NYSEMKT:TRT) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Trio-Tech International's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Trio-Tech International had US$2.50m of debt in September 2020, down from US$2.62m, one year before. However, it does have US$11.5m in cash offsetting this, leading to net cash of US$9.03m.
How Healthy Is Trio-Tech International's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Trio-Tech International had liabilities of US$7.13m due within 12 months and liabilities of US$3.16m due beyond that. On the other hand, it had cash of US$11.5m and US$6.65m worth of receivables due within a year. So it can boast US$7.89m more liquid assets than total liabilities.
This excess liquidity is a great indication that Trio-Tech International's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Trio-Tech International has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Trio-Tech International'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.
In the last year Trio-Tech International had a loss before interest and tax, and actually shrunk its revenue by 19%, to US$31m. We would much prefer see growth.
So How Risky Is Trio-Tech International?
While Trio-Tech International lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$693k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Trio-Tech International , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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