Does Chow Tai Seng Jewellery (SZSE:002867) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Chow Tai Seng Jewellery Co., Ltd. (SZSE:002867) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Chow Tai Seng Jewellery

How Much Debt Does Chow Tai Seng Jewellery Carry?

As you can see below, at the end of September 2024, Chow Tai Seng Jewellery had CN¥476.4m of debt, up from CN¥418.3m a year ago. Click the image for more detail. But it also has CN¥1.55b in cash to offset that, meaning it has CN¥1.08b net cash.

How Strong Is Chow Tai Seng Jewellery's Balance Sheet?

The latest balance sheet data shows that Chow Tai Seng Jewellery had liabilities of CN¥1.98b due within a year, and liabilities of CN¥74.3m falling due after that. Offsetting this, it had CN¥1.55b in cash and CN¥600.7m in receivables that were due within 12 months. So it actually has CN¥93.9m more liquid assets than total liabilities.

Having regard to Chow Tai Seng Jewellery's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥14.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Chow Tai Seng Jewellery has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Chow Tai Seng Jewellery has seen its EBIT plunge 10% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chow Tai Seng Jewellery can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Chow Tai Seng Jewellery may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Chow Tai Seng Jewellery recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chow Tai Seng Jewellery has CN¥1.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.3b, being 66% of its EBIT. So we are not troubled with Chow Tai Seng Jewellery's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Chow Tai Seng Jewellery is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.