Is Top Form International (HKG:333) Weighed On By Its Debt Load?

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.' 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. We note that Top Form International Limited (HKG:333) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Top Form International

How Much Debt Does Top Form International Carry?

The image below, which you can click on for greater detail, shows that Top Form International had debt of HK$88.6m at the end of December 2022, a reduction from HK$106.6m over a year. But it also has HK$114.1m in cash to offset that, meaning it has HK$25.5m net cash.

How Strong Is Top Form International's Balance Sheet?

We can see from the most recent balance sheet that Top Form International had liabilities of HK$271.0m falling due within a year, and liabilities of HK$62.1m due beyond that. Offsetting this, it had HK$114.1m in cash and HK$134.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$84.5m.

This deficit is considerable relative to its market capitalization of HK$108.4m, so it does suggest shareholders should keep an eye on Top Form International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Top Form International also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

In the last year Top Form International had a loss before interest and tax, and actually shrunk its revenue by 18%, to HK$1.2b. That's not what we would hope to see.

So How Risky Is Top Form International?

While Top Form International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$54m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. We've identified 2 warning signs with Top Form International (at least 1 which makes us a bit uncomfortable) , 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.