Basetrophy Group Holdings (HKG:8460) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Basetrophy Group Holdings Limited (HKG:8460) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Basetrophy Group Holdings

What Is Basetrophy Group Holdings's Debt?

As you can see below, Basetrophy Group Holdings had HK$12.2m of debt at June 2021, down from HK$15.1m a year prior. However, it also had HK$3.13m in cash, and so its net debt is HK$9.08m.

How Healthy Is Basetrophy Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Basetrophy Group Holdings had liabilities of HK$34.3m falling due within a year, and liabilities of HK$2.57m due beyond that. On the other hand, it had cash of HK$3.13m and HK$74.0m worth of receivables due within a year. So it actually has HK$40.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Basetrophy Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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 Basetrophy Group Holdings'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 Basetrophy Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 46%, to HK$76m. To be frank that doesn't bode well.

Caveat Emptor

While Basetrophy Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost HK$1.6m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. 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. 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. We've identified 3 warning signs with Basetrophy Group Holdings (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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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