Is Tsui Wah Holdings (HKG:1314) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Tsui Wah Holdings Limited (HKG:1314) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tsui Wah Holdings

How Much Debt Does Tsui Wah Holdings Carry?

As you can see below, Tsui Wah Holdings had HK$60.1m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has HK$197.0m in cash to offset that, meaning it has HK$136.9m net cash.

How Healthy Is Tsui Wah Holdings' Balance Sheet?

According to the last reported balance sheet, Tsui Wah Holdings had liabilities of HK$408.2m due within 12 months, and liabilities of HK$513.9m due beyond 12 months. Offsetting these obligations, it had cash of HK$197.0m as well as receivables valued at HK$8.83m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$716.2m.

The deficiency here weighs heavily on the HK$409.3m 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 definitely think shareholders need to watch this one closely. At the end of the day, Tsui Wah Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Tsui Wah Holdings 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tsui Wah Holdings'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, Tsui Wah Holdings made a loss at the EBIT level, and saw its revenue drop to HK$984m, which is a fall of 43%. To be frank that doesn't bode well.

So How Risky Is Tsui Wah Holdings?

Although Tsui Wah Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$2.7m. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Tsui Wah Holdings (1 is concerning!) that you should be aware of before investing here.

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.

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This article by Simply Wall St is general in nature. 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.
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