Is Bros Eastern.Ltd (SHSE:601339) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Bros Eastern.,Ltd (SHSE:601339) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Bros Eastern.Ltd

How Much Debt Does Bros Eastern.Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Bros Eastern.Ltd had CN¥6.55b of debt, an increase on CN¥5.07b, over one year. However, because it has a cash reserve of CN¥4.16b, its net debt is less, at about CN¥2.39b.

How Healthy Is Bros Eastern.Ltd's Balance Sheet?

We can see from the most recent balance sheet that Bros Eastern.Ltd had liabilities of CN¥5.21b falling due within a year, and liabilities of CN¥2.01b due beyond that. Offsetting this, it had CN¥4.16b in cash and CN¥689.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.37b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Bros Eastern.Ltd has a market capitalization of CN¥8.13b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bros Eastern.Ltd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Bros Eastern.Ltd had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥6.4b. That makes us nervous, to say the least.

Caveat Emptor

While Bros Eastern.Ltd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥141m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥962m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Bros Eastern.Ltd that you should be aware of before investing here.

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. 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.