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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Theme International Holdings Limited (HKG:990) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Theme International Holdings

How Much Debt Does Theme International Holdings Carry?

As you can see below, Theme International Holdings had HK$253.4m of debt at June 2022, down from HK$1.26b a year prior. But it also has HK$4.47b in cash to offset that, meaning it has HK$4.22b net cash.

How Strong Is Theme International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Theme International Holdings had liabilities of HK$7.03b falling due within a year, and liabilities of HK$16.7m due beyond that. On the other hand, it had cash of HK$4.47b and HK$4.44b worth of receivables due within a year. So it can boast HK$1.87b more liquid assets than total liabilities.

This surplus suggests that Theme International Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble 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 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Theme International Holdings 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. Happily for any shareholders, Theme International Holdings actually produced more free cash flow than EBIT over the last three years. 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 we empathize with investors who find debt concerning, you should keep in mind that Theme International Holdings has net cash of HK$4.22b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$7.5b, being 722% of its EBIT. The bottom line is that we do not find Theme International Holdings's debt levels at all concerning. Over time, share prices tend to follow earnings per share, so if you're interested in Theme International Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.