These 4 Measures Indicate That Bortex Global (HKG:8118) Is Using Debt Reasonably Well

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. Importantly, Bortex Global Limited (HKG:8118) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bortex Global

What Is Bortex Global's Net Debt?

The image below, which you can click on for greater detail, shows that at April 2022 Bortex Global had debt of HK$25.6m, up from HK$23.8m in one year. But it also has HK$50.2m in cash to offset that, meaning it has HK$24.6m 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$45.4m falling due within a year, and liabilities of HK$15.9m due beyond that. Offsetting this, it had HK$50.2m in cash and HK$42.1m in receivables that were due within 12 months. So it can boast HK$31.1m more liquid assets than total liabilities.

This surplus suggests that Bortex Global has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Bortex Global has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Bortex Global's EBIT was down 81% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Bortex Global has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Bortex Global's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bortex Global has HK$24.6m in net cash and a decent-looking balance sheet. So we are not troubled with Bortex Global's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Bortex Global (1 is concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.