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. Importantly, TBK & Sons Holdings Limited (HKG:1960) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TBK & Sons Holdings

What Is TBK & Sons Holdings's Net Debt?

As you can see below, TBK & Sons Holdings had RM9.66m of debt at December 2019, down from RM12.8m a year prior. However, its balance sheet shows it holds RM84.7m in cash, so it actually has RM75.1m net cash.

How Healthy Is TBK & Sons Holdings's Balance Sheet?

We can see from the most recent balance sheet that TBK & Sons Holdings had liabilities of RM69.0m falling due within a year, and liabilities of RM7.68m due beyond that. Offsetting this, it had RM84.7m in cash and RM96.9m in receivables that were due within 12 months. So it actually has RM105.0m more liquid assets than total liabilities.

This surplus liquidity suggests that TBK & Sons Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, TBK & Sons Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that TBK & Sons Holdings grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TBK & Sons Holdings 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.