Beaver Group (Holding) (HKG:8275) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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. As with many other companies Beaver Group (Holding) Company Limited (HKG:8275) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

See our latest analysis for Beaver Group (Holding)

What Is Beaver Group (Holding)'s Net Debt?

The image below, which you can click on for greater detail, shows that Beaver Group (Holding) had debt of HK$15.1m at the end of September 2021, a reduction from HK$26.0m over a year. On the flip side, it has HK$13.3m in cash leading to net debt of about HK$1.81m.

A Look At Beaver Group (Holding)'s Liabilities

The latest balance sheet data shows that Beaver Group (Holding) had liabilities of HK$45.0m due within a year, and liabilities of HK$10.9m falling due after that. On the other hand, it had cash of HK$13.3m and HK$64.4m worth of receivables due within a year. So it actually has HK$21.9m more liquid assets than total liabilities.

This surplus strongly suggests that Beaver Group (Holding) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beaver Group (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 Beaver Group (Holding) wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to HK$160m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Beaver Group (Holding) still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$26m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. To that end, you should learn about the 5 warning signs we've spotted with Beaver Group (Holding) (including 3 which are a bit concerning) .

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.