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.' 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. As with many other companies Bortex Global Limited (HKG:8118) makes use of debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Bortex Global Carry?
The image below, which you can click on for greater detail, shows that Bortex Global had debt of HK$15.2m at the end of April 2023, a reduction from HK$34.5m over a year. But it also has HK$22.4m in cash to offset that, meaning it has HK$7.23m net cash.
How Healthy Is Bortex Global's Balance Sheet?
We can see from the most recent balance sheet that Bortex Global had liabilities of HK$37.3m falling due within a year, and liabilities of HK$3.06m due beyond that. Offsetting this, it had HK$22.4m in cash and HK$14.5m in receivables that were due within 12 months. So it has liabilities totalling HK$3.44m more than its cash and near-term receivables, combined.
Since publicly traded Bortex Global shares are worth a total of HK$75.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Bortex Global also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bortex Global will need earnings to service that debt. 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.
Over 12 months, Bortex Global made a loss at the EBIT level, and saw its revenue drop to HK$48m, which is a fall of 65%. That makes us nervous, to say the least.
So How Risky Is Bortex Global?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Bortex Global had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$20m of cash and made a loss of HK$75m. Given it only has net cash of HK$7.23m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Bortex Global that 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.
Bortex Global Limited, an investment holding company, designs, manufactures, and trades in light-emitting diode (LED) lighting products in Canada, the United States, the People’s Republic of China, Hong Kong, and internationally.
Mediocre balance sheet with weak fundamentals.