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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Bortex Global Limited (HKG:8118) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Bortex Global's Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2021 Bortex Global had HK$26.5m of debt, an increase on HK$24.2m, over one year. But it also has HK$43.5m in cash to offset that, meaning it has HK$17.0m net cash.

How Strong Is Bortex Global's Balance Sheet?

We can see from the most recent balance sheet that Bortex Global had liabilities of HK$47.3m falling due within a year, and liabilities of HK$21.1m due beyond that. On the other hand, it had cash of HK$43.5m and HK$63.9m worth of receivables due within a year. So it can boast HK$39.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Bortex Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bortex Global boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Bortex Global's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bortex Global 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Bortex Global reported free cash flow worth 8.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Bortex Global has HK$17.0m in net cash and a decent-looking balance sheet. So we are not troubled with Bortex Global's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Bortex Global that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.