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 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. Importantly, Boill Healthcare Holdings Limited (HKG:1246) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

See our latest analysis for Boill Healthcare Holdings

How Much Debt Does Boill Healthcare Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Boill Healthcare Holdings had HK$824.2m of debt in March 2021, down from HK$961.9m, one year before. However, it also had HK$133.5m in cash, and so its net debt is HK$690.7m.

A Look At Boill Healthcare Holdings' Liabilities

The latest balance sheet data shows that Boill Healthcare Holdings had liabilities of HK$2.80b due within a year, and liabilities of HK$16.4m falling due after that. Offsetting these obligations, it had cash of HK$133.5m as well as receivables valued at HK$3.84m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.68b.

The deficiency here weighs heavily on the HK$373.5m 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. After all, Boill Healthcare Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. 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 reported revenue of HK$217m, which is a gain of 104%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Boill Healthcare Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable HK$66m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$142m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Boill Healthcare Holdings (of which 1 is a bit unpleasant!) you should know about.

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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