Top Spring International Holdings (HKG:3688) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Top Spring International Holdings Limited (HKG:3688) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Top Spring International Holdings

What Is Top Spring International Holdings's Net Debt?

As you can see below, Top Spring International Holdings had HK$10.3b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$2.11b in cash, and so its net debt is HK$8.18b.

How Healthy Is Top Spring International Holdings' Balance Sheet?

According to the last reported balance sheet, Top Spring International Holdings had liabilities of HK$12.5b due within 12 months, and liabilities of HK$5.10b due beyond 12 months. On the other hand, it had cash of HK$2.11b and HK$973.9m worth of receivables due within a year. So it has liabilities totalling HK$14.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$1.51b 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Top Spring International Holdings had a loss before interest and tax, and actually shrunk its revenue by 11%, to HK$615m. That's not what we would hope to see.

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$198m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But on the bright side the company actually produced a statutory profit of HK$25m and free cash flow of HK$774m. So while its ongoing EBIT might disappoint, it has a fair bit going for it! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Top Spring International Holdings (including 2 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.