Is BHCC Holding (HKG:1552) Weighed On By Its Debt Load?

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.' 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 BHCC Holding Limited (HKG:1552) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

Check out our latest analysis for BHCC Holding

How Much Debt Does BHCC Holding Carry?

The image below, which you can click on for greater detail, shows that at June 2020 BHCC Holding had debt of S$20.1m, up from S$16.8m in one year. But it also has S$28.9m in cash to offset that, meaning it has S$8.80m net cash.

How Healthy Is BHCC Holding's Balance Sheet?

According to the last reported balance sheet, BHCC Holding had liabilities of S$28.2m due within 12 months, and liabilities of S$19.1m due beyond 12 months. Offsetting these obligations, it had cash of S$28.9m as well as receivables valued at S$24.7m due within 12 months. So it actually has S$6.21m more liquid assets than total liabilities.

This surplus liquidity suggests that BHCC Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, BHCC Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is BHCC Holding'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.

In the last year BHCC Holding's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is BHCC Holding?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BHCC Holding had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of S$1.8m and booked a S$1.4m accounting loss. With only S$8.80m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with BHCC Holding (including 2 which are potentially serious) .

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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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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