Does BHCC Holding (HKG:1552) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies BHCC Holding Limited (HKG:1552) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for BHCC Holding

What Is BHCC Holding's Debt?

As you can see below, BHCC Holding had S$13.7m of debt at June 2023, down from S$16.0m a year prior. But on the other hand it also has S$33.3m in cash, leading to a S$19.7m net cash position.

A Look At BHCC Holding's Liabilities

According to the last reported balance sheet, BHCC Holding had liabilities of S$80.6m due within 12 months, and liabilities of S$2.14m due beyond 12 months. On the other hand, it had cash of S$33.3m and S$61.3m worth of receivables due within a year. So it can boast S$11.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that BHCC Holding's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that BHCC Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, BHCC Holding turned things around in the last 12 months, delivering and EBIT of S$6.8m. When analysing debt levels, the balance sheet is the obvious place to start. But it is BHCC Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. BHCC Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, BHCC Holding actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case BHCC Holding has S$19.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 207% of that EBIT to free cash flow, bringing in S$14m. So we don't think BHCC Holding's use of debt 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. For example, we've discovered 3 warning signs for BHCC Holding (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.