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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tai Hing Group Holdings Limited (HKG:6811) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Tai Hing Group Holdings
What Is Tai Hing Group Holdings's Net Debt?
As you can see below, Tai Hing Group Holdings had HK$509.9m of debt at June 2019, down from HK$1.02b a year prior. But on the other hand it also has HK$920.9m in cash, leading to a HK$411.0m net cash position.
How Strong Is Tai Hing Group Holdings's Balance Sheet?
The latest balance sheet data shows that Tai Hing Group Holdings had liabilities of HK$962.9m due within a year, and liabilities of HK$1.57b falling due after that. On the other hand, it had cash of HK$920.9m and HK$29.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.58b.
This deficit is considerable relative to its market capitalization of HK$2.01b, so it does suggest shareholders should keep an eye on Tai Hing Group Holdings's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Tai Hing Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Tai Hing Group Holdings saw its EBIT drop by 2.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tai Hing Group Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.