Is Basetrophy Group Holdings (HKG:8460) Using Too Much 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.' 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. 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Basetrophy Group Holdings

What Is Basetrophy Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Basetrophy Group Holdings had HK$15.1m of debt in June 2020, down from HK$16.2m, one year before. However, it also had HK$3.92m in cash, and so its net debt is HK$11.2m.

How Strong Is Basetrophy Group Holdings's Balance Sheet?

We can see from the most recent balance sheet that Basetrophy Group Holdings had liabilities of HK$91.5m falling due within a year, and liabilities of HK$2.30m due beyond that. Offsetting these obligations, it had cash of HK$3.92m as well as receivables valued at HK$129.8m due within 12 months. So it actually has HK$40.0m more liquid assets than total liabilities.

This surplus strongly suggests that Basetrophy Group Holdings 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 just as strong as misogynists are weak. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to HK$122m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Basetrophy Group Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at HK$1.6m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Basetrophy Group Holdings , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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