Here's Why TS Wonders Holding (HKG:1767) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, TS Wonders Holding Limited (HKG:1767) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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.
View our latest analysis for TS Wonders Holding
What Is TS Wonders Holding's Debt?
As you can see below, TS Wonders Holding had S$2.95m of debt at June 2019, down from S$3.50m a year prior. But it also has S$21.1m in cash to offset that, meaning it has S$18.1m net cash.
How Strong Is TS Wonders Holding's Balance Sheet?
We can see from the most recent balance sheet that TS Wonders Holding had liabilities of S$4.20m falling due within a year, and liabilities of S$4.65m due beyond that. Offsetting these obligations, it had cash of S$21.1m as well as receivables valued at S$8.70m due within 12 months. So it actually has S$20.9m more liquid assets than total liabilities.
It's good to see that TS Wonders Holding has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, TS Wonders Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that TS Wonders Holding's load is not too heavy, because its EBIT was down 34% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is TS Wonders Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. TS Wonders Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, TS Wonders Holding produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that TS Wonders Holding has net cash of S$18.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$4.0m, being 66% of its EBIT. So we are not troubled with TS Wonders Holding's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TS Wonders Holding's earnings per share history for free.
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.
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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.
