Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Tsim Sha Tsui Properties Limited (HKG:247) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tsim Sha Tsui Properties

What Is Tsim Sha Tsui Properties's Net Debt?

As you can see below, at the end of December 2019, Tsim Sha Tsui Properties had HK$7.56b of debt, up from HK$7.23b a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$9.69b in cash, so it actually has HK$2.14b net cash.

A Look At Tsim Sha Tsui Properties's Liabilities

According to the last reported balance sheet, Tsim Sha Tsui Properties had liabilities of HK$31.9b due within 12 months, and liabilities of HK$10.1b due beyond 12 months. Offsetting these obligations, it had cash of HK$9.69b as well as receivables valued at HK$6.78b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$25.5b.

This deficit isn't so bad because Tsim Sha Tsui Properties is worth HK$46.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Tsim Sha Tsui Properties boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Tsim Sha Tsui Properties saw its EBIT drop by 5.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tsim Sha Tsui Properties 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.