In This Article:
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tang Palace (China) Holdings Limited (HKG:1181) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Tang Palace (China) Holdings
How Much Debt Does Tang Palace (China) Holdings Carry?
As you can see below, at the end of December 2018, Tang Palace (China) Holdings had CN¥79.2m of debt, up from CN¥70.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥464.4m in cash, leading to a CN¥385.2m net cash position.
A Look At Tang Palace (China) Holdings's Liabilities
We can see from the most recent balance sheet that Tang Palace (China) Holdings had liabilities of CN¥383.7m falling due within a year, and liabilities of CN¥6.78m due beyond that. On the other hand, it had cash of CN¥464.4m and CN¥64.8m worth of receivables due within a year. So it actually has CN¥138.8m more liquid assets than total liabilities.
This surplus suggests that Tang Palace (China) Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tang Palace (China) Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Tang Palace (China) Holdings saw its EBIT drop by 8.7% 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 ultimately the future profitability of the business will decide if Tang Palace (China) Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.