Share Dilution

These 4 metrics indicate that Talent Property Group (HKG:760) is using debt in a risky way

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”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Talent Property Group Limited (HKG:760) uses debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies 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.

Check out our latest analysis for Talent Property Group

What is Talent Property Group’s debt?

As you can see below, Talent Property Group had a debt of 676.4 million yen in December 2021, compared to 857.4 million yen the previous year. However, he has 230.2 million national yen of cash to offset this, resulting in a net debt of approximately 446.3 million national yen.

SEHK: 760 Historical Debt to Equity April 8, 2022

How strong is Talent Property Group’s balance sheet?

We can see from the most recent balance sheet that Talent Property Group had liabilities of 2.04 billion yen due within one year, and liabilities of 474.8 million yen due beyond. In return, he had 230.2 million Cambodian yen in cash and 20.0 million Cambodian yen in debt due within 12 months. Thus, its liabilities total 2.26 billion Canadian yen more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the company itself, at 150.3 million yen, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet. We would therefore be watching his balance sheet closely, no doubt. After all, Talent Property Group would likely need a major recapitalization if it were to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Low interest coverage of 1.9x and an extremely high net debt to EBITDA ratio of 6.1 shook our confidence in Talent Property Group like a punch in the gut. This means that we would consider him to be heavily indebted. However, the silver lining was that Talent Property Group achieved a positive EBIT of 71 million Canadian yen in the last twelve months, an improvement on the loss of the previous year. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Talent Property Group will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Considering last year, Talent Property Group actually had a cash outflow, overall. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.

Our point of view

At first glance, Talent Property Group’s net debt to EBITDA left us uncertain about the stock, and its level of total liabilities was no more attractive than the single empty restaurant on the busiest night of the year. . But at least its EBIT growth rate isn’t that bad. After reviewing the data points discussed, we believe that Talent Property Group has too much debt. That kind of risk is acceptable to some, but it certainly doesn’t float our boat. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Talent Property Group you should know.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.