Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Boill Healthcare Holdings Limited (HKG:1246) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Boill Healthcare Holdings's 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. However, because it has a cash reserve of HK$30.9m, its net debt is less, at about HK$907.4m.
A Look At Boill Healthcare Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Boill Healthcare Holdings had liabilities of HK$623.8m due within 12 months and liabilities of HK$642.4m due beyond that. On the other hand, it had cash of HK$30.9m and HK$51.9m worth of receivables due within a year. So it has liabilities totalling HK$1.18b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the HK$292.0m 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'd watch its balance sheet closely, without a doubt. 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.
Over 12 months, Boill Healthcare Holdings made a loss at the EBIT level, and saw its revenue drop to HK$61m, which is a fall of 82%. To be frank that doesn't bode well.
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$60m at the EBIT level. 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 vaporized HK$15m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Boill Healthcare Holdings .
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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