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

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Basetrophy Group Holdings

What Is Basetrophy Group Holdings's Net Debt?

As you can see below, at the end of June 2023, Basetrophy Group Holdings had HK$24.4m of debt, up from HK$10.4m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$2.74m, its net debt is less, at about HK$21.6m.

A Look At Basetrophy Group Holdings' Liabilities

The latest balance sheet data shows that Basetrophy Group Holdings had liabilities of HK$55.7m due within a year, and liabilities of HK$8.18m falling due after that. Offsetting these obligations, it had cash of HK$2.74m as well as receivables valued at HK$91.0m due within 12 months. So it actually has HK$29.8m 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Basetrophy Group Holdings 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.

In the last year Basetrophy Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$82m. We would much prefer see growth.

Caveat Emptor

Not only did Basetrophy Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$7.3m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Basetrophy Group Holdings (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.