We Think Theme International Holdings (HKG:990) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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?

Our free stock report includes 2 warning signs investors should be aware of before investing in Theme International Holdings. Read for free now.

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. 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.

What Is Theme International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Theme International Holdings had HK$142.9m of debt, an increase on HK$4.34m, over one year. But it also has HK$6.48b in cash to offset that, meaning it has HK$6.33b net cash.

A Look At Theme International Holdings' Liabilities

According to the last reported balance sheet, Theme International Holdings had liabilities of HK$11.7b due within 12 months, and liabilities of HK$14.7m due beyond 12 months. On the other hand, it had cash of HK$6.48b and HK$5.55b worth of receivables due within a year. So it actually has HK$290.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Theme International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

View our latest analysis for Theme International Holdings

It is just as well that Theme International Holdings's load is not too heavy, because its EBIT was down 58% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$6.33b, as well as more liquid assets than liabilities. The cherry on top was that in converted 397% of that EBIT to free cash flow, bringing in HK$4.4b. So we are not troubled with Theme International Holdings's debt use. 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. We've identified 2 warning signs with Theme International Holdings , and understanding them should be part of your investment process.

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. 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.