Is BeijingWest Industries International (HKG:2339) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, BeijingWest Industries International Limited (HKG:2339) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for BeijingWest Industries International

What Is BeijingWest Industries International's Net Debt?

The image below, which you can click on for greater detail, shows that BeijingWest Industries International had debt of HK$70.6m at the end of June 2021, a reduction from HK$109.2m over a year. However, it does have HK$295.9m in cash offsetting this, leading to net cash of HK$225.3m.

How Healthy Is BeijingWest Industries International's Balance Sheet?

According to the last reported balance sheet, BeijingWest Industries International had liabilities of HK$739.9m due within 12 months, and liabilities of HK$703.5m due beyond 12 months. On the other hand, it had cash of HK$295.9m and HK$339.2m worth of receivables due within a year. So its liabilities total HK$808.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$407.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, BeijingWest Industries International would probably need a major re-capitalization if its creditors were to demand repayment. 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. There's no doubt that we learn most about debt from the balance sheet. But it is BeijingWest Industries International'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.

In the last year BeijingWest Industries International wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to HK$2.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is BeijingWest Industries International?

While BeijingWest Industries International lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$5.7m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for BeijingWest Industries International you should be aware of, and 1 of them shouldn't be ignored.

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.
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