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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. As with many other companies Tsit Wing International Holdings Limited (HKG:2119) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses 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 Tsit Wing International Holdings
What Is Tsit Wing International Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that Tsit Wing International Holdings had debt of HK$120.6m at the end of June 2019, a reduction from HK$179.4m over a year. But on the other hand it also has HK$322.6m in cash, leading to a HK$202.0m net cash position.
How Healthy Is Tsit Wing International Holdings's Balance Sheet?
We can see from the most recent balance sheet that Tsit Wing International Holdings had liabilities of HK$268.5m falling due within a year, and liabilities of HK$18.1m due beyond that. On the other hand, it had cash of HK$322.6m and HK$142.0m worth of receivables due within a year. So it actually has HK$178.0m more liquid assets than total liabilities.
It's good to see that Tsit Wing International Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Tsit Wing International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
Another good sign is that Tsit Wing International Holdings has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tsit Wing International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.