Is Trellidor Holdings (JSE:TRL) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Trellidor Holdings Limited (JSE:TRL) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Trellidor Holdings

How Much Debt Does Trellidor Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Trellidor Holdings had R108.4m of debt in December 2020, down from R117.2m, one year before. However, because it has a cash reserve of R34.2m, its net debt is less, at about R74.2m.

How Strong Is Trellidor Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trellidor Holdings had liabilities of R90.2m due within 12 months and liabilities of R86.2m due beyond that. On the other hand, it had cash of R34.2m and R65.1m worth of receivables due within a year. So it has liabilities totalling R77.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Trellidor Holdings has a market capitalization of R320.1m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Trellidor 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.

In the last year Trellidor Holdings had a loss before interest and tax, and actually shrunk its revenue by 15%, to R428m. We would much prefer see growth.

Caveat Emptor

While Trellidor 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 R3.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of R17m. In the meantime, we consider the stock very 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 4 warning signs we've spotted with Trellidor Holdings (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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