Health Check: How Prudently Does Top Form International (HKG:333) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Top Form International Limited (HKG:333) does carry debt. But the more important question is: how much risk is that debt creating?

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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. 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. 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.

What Is Top Form International's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Top Form International had debt of HK$99.9m, up from HK$92.0m in one year. On the flip side, it has HK$90.5m in cash leading to net debt of about HK$9.31m.

A Look At Top Form International's Liabilities

Zooming in on the latest balance sheet data, we can see that Top Form International had liabilities of HK$325.6m due within 12 months and liabilities of HK$61.1m due beyond that. Offsetting these obligations, it had cash of HK$90.5m as well as receivables valued at HK$170.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$126.1m.

When you consider that this deficiency exceeds the company's HK$94.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Top Form International'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.

View our latest analysis for Top Form International

In the last year Top Form International wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to HK$1.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Top Form International had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$6.1m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of HK$33m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Top Form International has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.