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.' 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. As with many other companies Tongkun Group Co., Ltd. (SHSE:601233) makes use of debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Tongkun Group
How Much Debt Does Tongkun Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Tongkun Group had CN¥56.2b of debt, an increase on CN¥42.7b, over one year. However, it also had CN¥19.9b in cash, and so its net debt is CN¥36.3b.
How Healthy Is Tongkun Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tongkun Group had liabilities of CN¥50.1b due within 12 months and liabilities of CN¥21.0b due beyond that. On the other hand, it had cash of CN¥19.9b and CN¥1.32b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥49.8b.
This deficit casts a shadow over the CN¥32.3b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Tongkun Group would likely require a major re-capitalisation if it had to pay its creditors today. 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 Tongkun Group'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.
Over 12 months, Tongkun Group reported revenue of CN¥77b, which is a gain of 37%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Tongkun Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥381m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥6.0b over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tongkun Group is showing 1 warning sign in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
