The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Beijing Sports and Entertainment Industry Group Limited (HKG:1803) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Beijing Sports and Entertainment Industry Group
How Much Debt Does Beijing Sports and Entertainment Industry Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Beijing Sports and Entertainment Industry Group had HK$45.2m of debt, an increase on HK$21.8m, over one year. However, its balance sheet shows it holds HK$120.6m in cash, so it actually has HK$75.4m net cash.
How Healthy Is Beijing Sports and Entertainment Industry Group's Balance Sheet?
We can see from the most recent balance sheet that Beijing Sports and Entertainment Industry Group had liabilities of HK$192.3m falling due within a year, and liabilities of HK$3.60m due beyond that. Offsetting these obligations, it had cash of HK$120.6m as well as receivables valued at HK$53.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$21.5m.
While this might seem like a lot, it is not so bad since Beijing Sports and Entertainment Industry Group has a market capitalization of HK$78.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Beijing Sports and Entertainment Industry Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Sports and Entertainment Industry Group's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Beijing Sports and Entertainment Industry Group made a loss at the EBIT level, and saw its revenue drop to HK$72m, which is a fall of 20%. To be frank that doesn't bode well.
So How Risky Is Beijing Sports and Entertainment Industry Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Beijing Sports and Entertainment Industry Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$4.5m of cash and made a loss of HK$45m. But the saving grace is the HK$75.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Beijing Sports and Entertainment Industry Group has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.