Does Twintek Investment Holdings (HKG:6182) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Twintek Investment Holdings Limited (HKG:6182) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Twintek Investment Holdings

What Is Twintek Investment Holdings's Debt?

As you can see below, at the end of September 2022, Twintek Investment Holdings had HK$55.3m of debt, up from HK$38.7m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$33.4m, its net debt is less, at about HK$22.0m.

A Look At Twintek Investment Holdings' Liabilities

According to the last reported balance sheet, Twintek Investment Holdings had liabilities of HK$104.9m due within 12 months, and liabilities of HK$1.60m due beyond 12 months. On the other hand, it had cash of HK$33.4m and HK$145.0m worth of receivables due within a year. So it actually has HK$71.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Twintek Investment Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But it is Twintek Investment Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Twintek Investment Holdings made a loss at the EBIT level, and saw its revenue drop to HK$291m, which is a fall of 10.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Twintek Investment Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$2.1m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Twintek Investment Holdings is showing 3 warning signs 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.