Health Check: How Prudently Does Tse Sui Luen Jewellery (International) (HKG:417) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tse Sui Luen Jewellery (International) Limited (HKG:417) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Tse Sui Luen Jewellery (International)

What Is Tse Sui Luen Jewellery (International)'s Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Tse Sui Luen Jewellery (International) had debt of HK$1.17b, up from HK$920.4m in one year. However, it does have HK$348.3m in cash offsetting this, leading to net debt of about HK$825.3m.

How Strong Is Tse Sui Luen Jewellery (International)'s Balance Sheet?

The latest balance sheet data shows that Tse Sui Luen Jewellery (International) had liabilities of HK$1.26b due within a year, and liabilities of HK$691.2m falling due after that. Offsetting these obligations, it had cash of HK$348.3m as well as receivables valued at HK$90.7m due within 12 months. So its liabilities total HK$1.51b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$274.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tse Sui Luen Jewellery (International) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Tse Sui Luen Jewellery (International)'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.

Over 12 months, Tse Sui Luen Jewellery (International) made a loss at the EBIT level, and saw its revenue drop to HK$2.6b, which is a fall of 6.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Tse Sui Luen Jewellery (International) produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$18m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$71m in the last year. So while it's not wise to assume the company will fail, we do think it's 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 instance, we've identified 3 warning signs for Tse Sui Luen Jewellery (International) (2 are a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.