Tiong Seng Holdings (SGX:BFI) Takes On Some Risk With Its Use Of Debt
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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. We can see that Tiong Seng Holdings Limited (SGX:BFI) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Tiong Seng Holdings
What Is Tiong Seng Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Tiong Seng Holdings had debt of S$97.2m, up from S$89.9m in one year. However, it also had S$46.1m in cash, and so its net debt is S$51.0m.
A Look At Tiong Seng Holdings's Liabilities
The latest balance sheet data shows that Tiong Seng Holdings had liabilities of S$319.2m due within a year, and liabilities of S$27.3m falling due after that. Offsetting these obligations, it had cash of S$46.1m as well as receivables valued at S$187.5m due within 12 months. So its liabilities total S$112.9m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's S$93.4m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.