Here's Why TS Wonders Holding (HKG:1767) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, TS Wonders Holding Limited (HKG:1767) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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.

View our latest analysis for TS Wonders Holding

What Is TS Wonders Holding's Debt?

As you can see below, at the end of December 2021, TS Wonders Holding had S$3.79m of debt, up from S$2.51m a year ago. Click the image for more detail. But on the other hand it also has S$26.3m in cash, leading to a S$22.5m net cash position.

How Healthy Is TS Wonders Holding's Balance Sheet?

We can see from the most recent balance sheet that TS Wonders Holding had liabilities of S$11.7m falling due within a year, and liabilities of S$5.24m due beyond that. Offsetting these obligations, it had cash of S$26.3m as well as receivables valued at S$14.1m due within 12 months. So it actually has S$23.4m more liquid assets than total liabilities.

This surplus strongly suggests that TS Wonders Holding has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, TS Wonders Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that TS Wonders Holding's load is not too heavy, because its EBIT was down 37% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since TS Wonders Holding will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TS Wonders Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, TS Wonders Holding's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TS Wonders Holding has net cash of S$22.5m, as well as more liquid assets than liabilities. So we are not troubled with TS Wonders Holding's debt use. 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 - TS Wonders Holding has 3 warning signs we think 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.

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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.