We Think Tsim Sha Tsui Properties (HKG:247) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Tsim Sha Tsui Properties Limited (HKG:247) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tsim Sha Tsui Properties

How Much Debt Does Tsim Sha Tsui Properties Carry?

The chart below, which you can click on for greater detail, shows that Tsim Sha Tsui Properties had HK$9.25b in debt in June 2021; about the same as the year before. However, it does have HK$28.6b in cash offsetting this, leading to net cash of HK$19.4b.

How Strong Is Tsim Sha Tsui Properties' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tsim Sha Tsui Properties had liabilities of HK$18.0b due within 12 months and liabilities of HK$8.31b due beyond that. Offsetting this, it had HK$28.6b in cash and HK$7.05b in receivables that were due within 12 months. So it can boast HK$9.33b more liquid assets than total liabilities.

This excess liquidity suggests that Tsim Sha Tsui Properties is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Tsim Sha Tsui Properties has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Tsim Sha Tsui Properties grew its EBIT by 368% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Tsim Sha Tsui Properties'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tsim Sha Tsui Properties has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tsim Sha Tsui Properties actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tsim Sha Tsui Properties has net cash of HK$19.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in HK$2.2b. When it comes to Tsim Sha Tsui Properties's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should learn about the 2 warning signs we've spotted with Tsim Sha Tsui Properties (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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