Is Boill Healthcare Holdings (HKG:1246) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Boill Healthcare Holdings Limited (HKG:1246) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Boill Healthcare Holdings

What Is Boill Healthcare Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Boill Healthcare Holdings had debt of HK$938.3m at the end of September 2020, a reduction from HK$998.9m over a year. On the flip side, it has HK$30.9m in cash leading to net debt of about HK$907.4m.

How Strong Is Boill Healthcare Holdings's Balance Sheet?

According to the last reported balance sheet, Boill Healthcare Holdings had liabilities of HK$623.8m due within 12 months, and liabilities of HK$642.4m due beyond 12 months. On the other hand, it had cash of HK$30.9m and HK$51.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.18b.

The deficiency here weighs heavily on the HK$353.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Boill Healthcare Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Boill Healthcare Holdings 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.

In the last year Boill Healthcare Holdings had a loss before interest and tax, and actually shrunk its revenue by 82%, to HK$61m. That makes us nervous, to say the least.

Caveat Emptor

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). Its EBIT loss was a whopping HK$60m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost HK$201m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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 3 warning signs for Boill Healthcare Holdings that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. 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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