These 4 Measures Indicate That Town Ray Holdings (HKG:1692) Is Using Debt Reasonably Well

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.' 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. Importantly, Town Ray Holdings Limited (HKG:1692) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 Town Ray Holdings

How Much Debt Does Town Ray Holdings Carry?

As you can see below, Town Ray Holdings had HK$21.4m of debt at December 2023, down from HK$35.8m a year prior. However, its balance sheet shows it holds HK$187.7m in cash, so it actually has HK$166.3m net cash.

How Healthy Is Town Ray Holdings' Balance Sheet?

We can see from the most recent balance sheet that Town Ray Holdings had liabilities of HK$129.2m falling due within a year, and liabilities of HK$3.50m due beyond that. Offsetting these obligations, it had cash of HK$187.7m as well as receivables valued at HK$67.1m due within 12 months. So it can boast HK$122.2m more liquid assets than total liabilities.

This surplus suggests that Town Ray Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Town Ray Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Town Ray Holdings's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Town Ray Holdings will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Town Ray 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, Town Ray Holdings actually produced more free cash flow than EBIT over the last three years. 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 Town Ray Holdings has net cash of HK$166.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in HK$306m. So we don't think Town Ray Holdings's use of debt is risky. 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 1 warning sign for Town Ray Holdings you should be aware of.

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. 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.