Yahoo Finance These 4 Measures Indicate That BHCC Holding (HKG:1552) Is Using Debt Extensively
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, BHCC Holding Limited (HKG:1552) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for BHCC Holding
What Is BHCC Holding's Debt?
As you can see below, at the end of December 2019, BHCC Holding had S$20.7m of debt, up from S$16.3m a year ago. Click the image for more detail. But on the other hand it also has S$27.7m in cash, leading to a S$6.99m net cash position.
A Look At BHCC Holding's Liabilities
Zooming in on the latest balance sheet data, we can see that BHCC Holding had liabilities of S$36.7m due within 12 months and liabilities of S$19.8m due beyond that. Offsetting this, it had S$27.7m in cash and S$33.5m in receivables that were due within 12 months. So it can boast S$4.73m more liquid assets than total liabilities.
This surplus liquidity suggests that BHCC Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that BHCC Holding has more cash than debt is arguably a good indication that it can manage its debt safely.
Importantly, BHCC Holding's EBIT fell a jaw-dropping 68% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BHCC Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While BHCC Holding 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. During the last three years, BHCC Holding burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that BHCC Holding has net cash of S$6.99m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about BHCC Holding's balance sheet. 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 learn about the 6 warning signs we've spotted with BHCC Holding (including 3 which is make us uncomfortable) .
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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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. 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. Thank you for reading.
