These 4 Measures Indicate That Theme International Holdings (HKG:990) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Theme International Holdings Limited (HKG:990) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Theme International Holdings

What Is Theme International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Theme International Holdings had HK$808.4m of debt, an increase on HK$495.4m, over one year. But it also has HK$1.53b in cash to offset that, meaning it has HK$726.5m net cash.

How Strong Is Theme International Holdings's Balance Sheet?

The latest balance sheet data shows that Theme International Holdings had liabilities of HK$2.39b due within a year, and liabilities of HK$12.7m falling due after that. Offsetting this, it had HK$1.53b in cash and HK$1.14b in receivables that were due within 12 months. So it can boast HK$276.5m more liquid assets than total liabilities.

This excess liquidity suggests that Theme International Holdings is taking a careful approach to debt. 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 Theme International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Theme International Holdings grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Theme International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Theme International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Theme International Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Theme International Holdings has HK$726.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 2,437% of that EBIT to free cash flow, bringing in HK$11b. The bottom line is that we do not find Theme International Holdings's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Theme International Holdings you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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