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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. 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. Importantly, Tenfu (Cayman) Holdings Company Limited (HKG:6868) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Tenfu (Cayman) Holdings
How Much Debt Does Tenfu (Cayman) Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Tenfu (Cayman) Holdings had CN¥397.1m of debt, an increase on CN¥293.0m, over one year. However, it does have CN¥386.1m in cash offsetting this, leading to net debt of about CN¥11.0m.
How Healthy Is Tenfu (Cayman) Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tenfu (Cayman) Holdings had liabilities of CN¥798.4m due within 12 months and liabilities of CN¥157.2m due beyond that. Offsetting this, it had CN¥386.1m in cash and CN¥223.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥346.5m.
Of course, Tenfu (Cayman) Holdings has a market capitalization of CN¥5.89b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Tenfu (Cayman) Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load!
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).