Is Twintek Investment Holdings (HKG:6182) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Twintek Investment Holdings Limited (HKG:6182) makes use of debt. But is this debt a concern to shareholders?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Twintek Investment Holdings

How Much Debt Does Twintek Investment Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Twintek Investment Holdings had HK$45.6m of debt, an increase on HK$42.2m, over one year. However, it does have HK$68.5m in cash offsetting this, leading to net cash of HK$22.9m.

How Strong Is Twintek Investment Holdings' Balance Sheet?

We can see from the most recent balance sheet that Twintek Investment Holdings had liabilities of HK$82.7m falling due within a year, and liabilities of HK$364.0k due beyond that. Offsetting these obligations, it had cash of HK$68.5m as well as receivables valued at HK$119.4m due within 12 months. So it actually has HK$104.9m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Twintek Investment Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Twintek Investment Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Twintek Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to HK$237m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Twintek Investment Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Twintek Investment Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$5.2m of cash and made a loss of HK$8.4m. While this does make the company a bit risky, it's important to remember it has net cash of HK$22.9m. That means it could keep spending at its current rate for more than two years. Twintek Investment Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Twintek Investment Holdings (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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