Times China Holdings (HKG: 1233) takes risks with its use of debt
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Times China Holdings Limited (HKG: 1233) uses debt in its business. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business 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 flow and debt together.
Check out our latest analysis for Times China Holdings
What is the debt of Times China Holdings?
As you can see below, Times China Holdings had a debt of CND 55.7 billion in June 2021, up from CNN 59.9 billion the year before. On the other hand, he has CNN 22.2 billion in cash, resulting in net debt of around CNN 33.6 billion.
A look at the liabilities of Times China Holdings
According to the latest published balance sheet, Times China Holdings had liabilities of 122.0 billion yen due within 12 months and commitments of 48.6 billion yen due beyond 12 months. On the other hand, he had CN 22.2 billion in cash and CN 19.1 billion in receivables due within one year. It therefore has liabilities totaling 129.3 billion yen more than its cash and short-term receivables combined.
This deficit casts a shadow over CN ¥ 10.2b society, like a colossus towering over mere mortals. So we would be watching its record closely, without a doubt. After all, Times China Holdings would likely need a major recapitalization if it were to pay its creditors today.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Times China Holdings has a debt to EBITDA ratio of 3.7, which signals significant debt, but is still fairly reasonable for most types of businesses. However, its interest coverage of 16.6 is very high, suggesting that interest charges on debt are currently quite low. We have seen Times China Holdings increase its EBIT by 3.5% over the past twelve months. While this hardly strikes us, it is a bright spot when it comes to debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Times China Holdings can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Times China Holdings has reported free cash flow of 5.5% of its EBIT, which is really pretty low. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
We would go so far as to say that Times China Holdings’ level of total liabilities was disappointing. But at least it’s decent enough to cover its interest costs with its EBIT; it’s encouraging. Overall, it seems to us that Times China Holdings’ balance sheet is a real risk to the company. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, Times China Holdings has 4 warning signs (and 1 which doesn’t suit us very well) we think you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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