Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. 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. As with many other companies Bonso Electronics International Inc. (NASDAQ:BNSO) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Bonso Electronics International Carry?
As you can see below, at the end of March 2019, Bonso Electronics International had US$2.93m of debt, up from US$2.7 a year ago. Click the image for more detail. But on the other hand it also has US$7.63m in cash, leading to a US$4.70m net cash position.
How Healthy Is Bonso Electronics International’s Balance Sheet?
The latest balance sheet data shows that Bonso Electronics International had liabilities of US$4.16m due within a year, and liabilities of US$3.18m falling due after that. On the other hand, it had cash of US$7.63m and US$1.95m worth of receivables due within a year. So it can boast US$2.24m more liquid assets than total liabilities.
This surplus suggests that Bonso Electronics International is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that Bonso Electronics International has more cash than debt is arguably a good indication that it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Bonso Electronics International will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Bonso Electronics International made a loss at the EBIT level, and saw its revenue drop to US$10.0m, which is a fall of 13%. We would much prefer see growth.
So How Risky Is Bonso Electronics International?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Bonso Electronics International lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$563k of cash and made a loss of US$463k. With only US$4.70m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Bonso Electronics International’s profit, revenue, and operating cashflow have changed over the last few years.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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