Is Citychamp Watch & Jewellery Group (HKG:256) Using Too Much 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 note that Citychamp Watch & Jewellery Group Limited (HKG:256) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Citychamp Watch & Jewellery Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Citychamp Watch & Jewellery Group had HK$609.5m of debt in June 2025, down from HK$900.5m, one year before. But on the other hand it also has HK$1.19b in cash, leading to a HK$579.5m net cash position.

How Healthy Is Citychamp Watch & Jewellery Group's Balance Sheet?

According to the last reported balance sheet, Citychamp Watch & Jewellery Group had liabilities of HK$319.6m due within 12 months, and liabilities of HK$15.7b due beyond 12 months. On the other hand, it had cash of HK$1.19b and HK$9.46b worth of receivables due within a year. So its liabilities total HK$5.42b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$1.33b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Citychamp Watch & Jewellery Group would probably need a major re-capitalization if its creditors were to demand repayment. Citychamp Watch & Jewellery Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

See our latest analysis for Citychamp Watch & Jewellery Group

Shareholders should be aware that Citychamp Watch & Jewellery Group's EBIT was down 79% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Citychamp Watch & Jewellery Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Citychamp Watch & Jewellery Group 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. Happily for any shareholders, Citychamp Watch & Jewellery Group 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

Although Citychamp Watch & Jewellery Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$579.5m. And it impressed us with free cash flow of HK$435m, being 169% of its EBIT. Despite its cash we think that Citychamp Watch & Jewellery Group seems to struggle to handle its total liabilities, so we are wary of the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Citychamp Watch & Jewellery Group (1 is significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.