We Think Basetrophy Group Holdings (HKG:8460) Has A Fair Chunk Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Basetrophy Group Holdings Limited (HKG:8460) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. 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?

The chart below, which you can click on for greater detail, shows that Basetrophy Group Holdings had HK$15.6m in debt in June 2021; about the same as the year before. However, it does have HK$3.13m in cash offsetting this, leading to net debt of about HK$12.5m.

How Healthy Is Basetrophy Group Holdings' Balance Sheet?

The latest balance sheet data shows that Basetrophy Group Holdings had liabilities of HK$34.3m due within a year, and liabilities of HK$2.57m falling due after 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 excess liquidity is a great indication that Basetrophy Group Holdings' balance sheet is almost as strong as Fort Knox. 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.

Over 12 months, Basetrophy Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$76m, which is a fall of 38%. 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$1.9m 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. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Basetrophy Group Holdings (of which 1 is potentially serious!) you should know about.

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.