Is Tse Sui Luen Jewellery (International) (HKG:417) Weighed On By Its Debt Load?

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.' 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, Tse Sui Luen Jewellery (International) Limited (HKG:417) does carry debt. But is this debt a concern to shareholders?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tse Sui Luen Jewellery (International)

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

As you can see below, Tse Sui Luen Jewellery (International) had HK$1.00b of debt at September 2024, down from HK$1.16b a year prior. However, because it has a cash reserve of HK$110.1m, its net debt is less, at about HK$890.3m.

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

Zooming in on the latest balance sheet data, we can see that Tse Sui Luen Jewellery (International) had liabilities of HK$1.21b due within 12 months and liabilities of HK$489.1m due beyond that. Offsetting this, it had HK$110.1m in cash and HK$80.2m in receivables that were due within 12 months. So it has liabilities totalling HK$1.51b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$179.4m 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. After all, Tse Sui Luen Jewellery (International) would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tse Sui Luen Jewellery (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.

Over 12 months, Tse Sui Luen Jewellery (International) made a loss at the EBIT level, and saw its revenue drop to HK$2.2b, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

While Tse Sui Luen Jewellery (International)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$253m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$360m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 2 warning signs for Tse Sui Luen Jewellery (International) you should be aware of, and 1 of them is significant.

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.