Chow Tai Fook Jewellery Group (HKG:1929) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 note that Chow Tai Fook Jewellery Group Limited (HKG:1929) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Chow Tai Fook Jewellery Group Carry?

You can click the graphic below for the historical numbers, but it shows that Chow Tai Fook Jewellery Group had HK$19.7b of debt in March 2025, down from HK$28.6b, one year before. On the flip side, it has HK$7.58b in cash leading to net debt of about HK$12.1b.

How Strong Is Chow Tai Fook Jewellery Group's Balance Sheet?

We can see from the most recent balance sheet that Chow Tai Fook Jewellery Group had liabilities of HK$48.1b falling due within a year, and liabilities of HK$1.00b due beyond that. On the other hand, it had cash of HK$7.58b and HK$4.27b worth of receivables due within a year. So it has liabilities totalling HK$37.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Chow Tai Fook Jewellery Group has a huge market capitalization of HK$136.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

Check out our latest analysis for Chow Tai Fook Jewellery Group

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Chow Tai Fook Jewellery Group has a low net debt to EBITDA ratio of only 0.80. And its EBIT easily covers its interest expense, being 36.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Chow Tai Fook Jewellery Group has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chow Tai Fook Jewellery Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Chow Tai Fook Jewellery Group recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Chow Tai Fook Jewellery Group's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Looking at the bigger picture, we think Chow Tai Fook Jewellery Group's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Chow Tai Fook Jewellery Group .

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.