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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Texwinca Holdings Limited (HKG:321) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Texwinca Holdings
What Is Texwinca Holdings's Debt?
As you can see below, Texwinca Holdings had HK$1.53b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. But it also has HK$2.21b in cash to offset that, meaning it has HK$676.9m net cash.
How Strong Is Texwinca Holdings's Balance Sheet?
According to the last reported balance sheet, Texwinca Holdings had liabilities of HK$3.07b due within 12 months, and liabilities of HK$135.9m due beyond 12 months. Offsetting these obligations, it had cash of HK$2.21b as well as receivables valued at HK$950.5m due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Texwinca Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$2.61b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Texwinca Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that Texwinca Holdings has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Texwinca Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.