Does Topsports International Holdings (HKG:6110) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Topsports International Holdings Limited (HKG:6110) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Topsports International Holdings

What Is Topsports International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Topsports International Holdings had debt of CN¥720.1m at the end of February 2024, a reduction from CN¥1.55b over a year. But on the other hand it also has CN¥2.82b in cash, leading to a CN¥2.10b net cash position.

How Healthy Is Topsports International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Topsports International Holdings had liabilities of CN¥3.35b due within 12 months and liabilities of CN¥1.35b due beyond that. Offsetting this, it had CN¥2.82b in cash and CN¥1.33b in receivables that were due within 12 months. So its liabilities total CN¥544.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Topsports International Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥28.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Topsports International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Topsports International Holdings grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Topsports International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Topsports International Holdings 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, Topsports International Holdings 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

We could understand if investors are concerned about Topsports International Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.10b. And it impressed us with free cash flow of CN¥2.7b, being 132% of its EBIT. So is Topsports International Holdings's debt a risk? It doesn't seem so to 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. We've identified 1 warning sign with Topsports International Holdings , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com