In This Article:
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tomson Group Limited (HKG:258) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Tomson Group
How Much Debt Does Tomson Group Carry?
As you can see below, Tomson Group had HK$1.31b of debt at June 2019, down from HK$1.53b a year prior. However, it does have HK$4.36b in cash offsetting this, leading to net cash of HK$3.04b.
A Look At Tomson Group's Liabilities
We can see from the most recent balance sheet that Tomson Group had liabilities of HK$6.14b falling due within a year, and liabilities of HK$2.22b due beyond that. Offsetting these obligations, it had cash of HK$4.36b as well as receivables valued at HK$533.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$3.47b.
This is a mountain of leverage relative to its market capitalization of HK$3.82b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Tomson Group boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Tomson Group's load is not too heavy, because its EBIT was down 76% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tomson Group 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.