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, Trio Industrial Electronics Group Limited (HKG:1710) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Trio Industrial Electronics Group
What Is Trio Industrial Electronics Group's Net Debt?
As you can see below, at the end of June 2024, Trio Industrial Electronics Group had HK$26.9m of debt, up from HK$17.4m a year ago. Click the image for more detail. But it also has HK$103.9m in cash to offset that, meaning it has HK$76.9m net cash.
How Healthy Is Trio Industrial Electronics Group's Balance Sheet?
According to the last reported balance sheet, Trio Industrial Electronics Group had liabilities of HK$189.7m due within 12 months, and liabilities of HK$97.6m due beyond 12 months. Offsetting these obligations, it had cash of HK$103.9m as well as receivables valued at HK$173.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$9.57m.
Given Trio Industrial Electronics Group has a market capitalization of HK$126.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Trio Industrial Electronics Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, Trio Industrial Electronics Group's EBIT fell a jaw-dropping 96% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Trio Industrial Electronics Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Trio Industrial Electronics Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Trio Industrial Electronics Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
We could understand if investors are concerned about Trio Industrial Electronics Group's liabilities, but we can be reassured by the fact it has has net cash of HK$76.9m. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in HK$64m. So we are not troubled with Trio Industrial Electronics Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Trio Industrial Electronics Group that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.