Health Check: How Prudently Does BeijingWest Industries International (HKG:2339) Use Debt?

By
Simply Wall St
Published
May 12, 2022
SEHK:2339
Source: Shutterstock

Warren Buffett famously said, '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. We note that BeijingWest Industries International Limited (HKG:2339) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for BeijingWest Industries International

What Is BeijingWest Industries International's Debt?

As you can see below, BeijingWest Industries International had HK$65.7m of debt at December 2021, down from HK$104.2m a year prior. But on the other hand it also has HK$226.0m in cash, leading to a HK$160.3m net cash position.

debt-equity-history-analysis
SEHK:2339 Debt to Equity History May 12th 2022

How Strong Is BeijingWest Industries International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BeijingWest Industries International had liabilities of HK$625.6m due within 12 months and liabilities of HK$523.2m due beyond that. Offsetting these obligations, it had cash of HK$226.0m as well as receivables valued at HK$508.4m due within 12 months. So its liabilities total HK$414.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$327.4m, we think shareholders really should watch BeijingWest Industries International's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that BeijingWest Industries International has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BeijingWest Industries 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, BeijingWest Industries International reported revenue of HK$2.6b, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is BeijingWest Industries International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months BeijingWest Industries International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$121m and booked a HK$9.3m accounting loss. Given it only has net cash of HK$160.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 2 warning signs for BeijingWest Industries International you should be aware of, and 1 of them is potentially serious.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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