We Think TS Wonders Holding (HKG:1767) Can Manage Its Debt With Ease

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. Importantly, TS Wonders Holding Limited (HKG:1767) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View our latest analysis for TS Wonders Holding

How Much Debt Does TS Wonders Holding Carry?

You can click the graphic below for the historical numbers, but it shows that TS Wonders Holding had S$2.86m of debt in December 2022, down from S$3.79m, one year before. However, it does have S$29.9m in cash offsetting this, leading to net cash of S$27.0m.

How Strong Is TS Wonders Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TS Wonders Holding had liabilities of S$7.56m due within 12 months and liabilities of S$4.74m due beyond that. Offsetting these obligations, it had cash of S$29.9m as well as receivables valued at S$13.2m due within 12 months. So it can boast S$30.7m more liquid assets than total liabilities.

This surplus liquidity suggests that TS Wonders Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, TS Wonders Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that TS Wonders Holding grew its EBIT by 11% last year, making its debt load easier to handle. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, TS Wonders Holding produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that TS Wonders Holding has net cash of S$27.0m and plenty of liquid assets. So is TS Wonders Holding's debt a risk? It doesn't seem so to 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. We've identified 1 warning sign with TS Wonders Holding , and understanding them should be part of your investment process.

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.