Does Top Form International (HKG:333) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Form International Limited (HKG:333) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Top Form International

What Is Top Form International's Net Debt?

As you can see below, at the end of June 2019, Top Form International had HK$40.3m of debt, up from HK$211.0k a year ago. Click the image for more detail. However, it does have HK$95.3m in cash offsetting this, leading to net cash of HK$55.0m.

How Healthy Is Top Form International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Top Form International had liabilities of HK$257.2m due within 12 months and liabilities of HK$39.1m due beyond that. On the other hand, it had cash of HK$95.3m and HK$243.2m worth of receivables due within a year. So it actually has HK$42.1m more liquid assets than total liabilities.

This excess liquidity suggests that Top Form International is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Top Form International has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Top Form International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Top Form International had negative earnings before interest and tax, and actually shrunk its revenue by 4.3%, to HK$1.2b. That's not what we would hope to see.

So How Risky Is Top Form International?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Top Form International had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of HK$46m and booked a HK$61m accounting loss. With only HK$55.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Top Form International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.