Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, BHCC Holding Limited (HKG: 1552) is in debt. But the most important question is: what is the risk that this debt creates?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
What is the amount of BHCC Holding’s debt?
As you can see below, at the end of December 2020, BHCC Holding had $ 24.5 million in debt, up from $ 20.7 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds S $ 44.9 million in cash, so he actually has $ 20.4 million in net cash.
A look at the liabilities of BHCC Holding
We can see from the most recent balance sheet that BHCC Holding had liabilities of S $ 52.4 million due in one year and liabilities of S $ 23.3 million beyond. In return, he had S $ 44.9 million in cash and S $ 41.1 million in receivables due within 12 months. So he actually has S $ 10.2million After liquid assets than total liabilities.
This succulent liquidity means that BHCC Holding’s balance sheet is as solid as a giant sequoia. Given this fact, we believe its track record is as strong as an ox. Put simply, the fact that BHCC Holding has more cash than debt is arguably a good indication that it can safely manage its debt.
Shareholders should know that BHCC Holding’s EBIT fell by 70% last year. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at the debt in total isolation; since BHCC Holding will need income to service this debt. So if you want to know more about his earnings, it might be worth checking out this graph of the evolution of its long-term profits.
But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. Although BHCC Holding has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building ( or erodes) that cash. balanced. Over the past three years, BHCC Holding has recorded a free cash flow of 28% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
While we sympathize with investors who find debt of concern, you should keep in mind that BHCC Holding has net cash of S $ 20.4 million, as well as more liquid assets than liabilities. We are therefore not concerned about the use of debt by BHCC Holding. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, BHCC Holding has 5 warning signs (and 2 which are a little unpleasant) we think you should know.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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