Is Bortex Global (HKG:8118) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Bortex Global Limited (HKG:8118) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bortex Global

How Much Debt Does Bortex Global Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2021 Bortex Global had HK$23.8m of debt, an increase on HK$13.2m, over one year. But on the other hand it also has HK$52.6m in cash, leading to a HK$28.9m net cash position.

A Look At Bortex Global's Liabilities

Zooming in on the latest balance sheet data, we can see that Bortex Global had liabilities of HK$40.7m due within 12 months and liabilities of HK$22.0m due beyond that. Offsetting these obligations, it had cash of HK$52.6m as well as receivables valued at HK$51.3m due within 12 months. So it can boast HK$41.1m more liquid assets than total liabilities.

This luscious liquidity implies that Bortex Global's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Bortex Global has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Bortex Global has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bortex Global'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bortex Global 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. In the last three years, Bortex Global's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bortex Global has net cash of HK$28.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 33% over the last year. So we don't think Bortex Global's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Bortex Global you should be aware of.

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. 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.
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