TANSH Global Food Group (HKG:3666) has debt but no revenue; Should you be worried?

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Mostly, TANSH Global Food Group Co.,Ltd (HKG:3666) is in debt. But does this debt worry shareholders?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest 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 TANSH Global Food Group

What is the debt of TANSH Global Food Group?

As you can see below, TANSH Global Food Group had a debt of 31.3 million yen in December 2021, compared to 39.0 million yen the previous year. But he also has 78.5 million yen in cash to make up for that, which means he has a net cash of 47.2 million yen.

SEHK: 3666 Historical Debt to Equity April 5, 2022

A look at the responsibilities of TANSH Global Food Group

The latest balance sheet data shows that TANSH Global Food Group had liabilities of 302.8 million yen maturing within one year, and liabilities of 192.2 million yen maturing thereafter. In compensation for these obligations, it had cash of 78.5 million yen as well as receivables valued at 5.47 million yen due within 12 months. Thus, its liabilities total 411.2 million Canadian yen more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the 137.2 million yen business, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, TANSH Global Food Group would likely need a major recapitalization if it were to pay its creditors today. TANSH Global Food Group has net cash, so it is fair to say that it does not have heavy debt, although it has very large liabilities, in total. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since TANSH Global Food Group will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Year-over-year, TANSH Global Food Group reported revenue of 692 million Canadian yen, a gain of 7.3%, although it reported no earnings before interest and taxes. We generally like to see faster growth from unprofitable businesses, but each in its own way.

So how risky is TANSH Global Food Group?

Although TANSH Global Food Group recorded a loss of earnings before interest and taxes (EBIT) in the last twelve months, it generated a positive free cash flow of 92 million yen. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. Given the lack of transparency around future revenue (and cash flow), we’re nervous about this one, until it hits its first big sales. For us, this is a high risk game. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for TANSH Global Food Group (1 doesn’t sit too well with us) you should know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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