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Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘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. We can see that Boill Healthcare Holdings Limited (HKG:1246) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Boill Healthcare Holdings’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Boill Healthcare Holdings had HK$1.05b of debt in March 2019, down from HK$1.21b, one year before On the flip side, it has HK$68.2m in cash leading to net debt of about HK$984.2m.
A Look At Boill Healthcare Holdings’s Liabilities
Zooming in on the latest balance sheet data, we can see that Boill Healthcare Holdings had liabilities of HK$1.28b due within 12 months and liabilities of HK$102.7m due beyond that. Offsetting these obligations, it had cash of HK$68.2m as well as receivables valued at HK$26.8m due within 12 months. So its liabilities total HK$1.29b 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$898.3m, we think shareholders really should watch Boill Healthcare Holdings’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. Since Boill Healthcare Holdings does have net debt, we think it is worthwhile for shareholders to keep an eye on the balance sheet, over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Boill Healthcare Holdings’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, Boill Healthcare Holdings saw its revenue drop to HK$420m, which is a fall of 43%. That makes us nervous, to say the least.
Not only did Boill Healthcare Holdings’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$103m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It’s fair to say the loss of-HK$200.1m didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be risky. 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 Boill Healthcare Holdings’s profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.