Is Top Spring International Holdings (HKG:3688) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Top Spring International Holdings Limited (HKG:3688) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Top Spring International Holdings

What Is Top Spring International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Top Spring International Holdings had debt of HK$8.42b, up from HK$7.70b in one year. However, it also had HK$512.7m in cash, and so its net debt is HK$7.91b.

How Healthy Is Top Spring International Holdings' Balance Sheet?

According to the last reported balance sheet, Top Spring International Holdings had liabilities of HK$6.43b due within 12 months, and liabilities of HK$5.52b due beyond 12 months. Offsetting these obligations, it had cash of HK$512.7m as well as receivables valued at HK$574.9m due within 12 months. So it has liabilities totalling HK$10.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$825.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Top Spring International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Top Spring International Holdings'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.

In the last year Top Spring International Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to HK$909m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Top Spring International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$895m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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$1.4b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 - Top Spring International Holdings has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.