We Think Brilliant Circle Holdings International (HKG:1008) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Brilliant Circle Holdings International Limited (HKG:1008) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Brilliant Circle Holdings International

What Is Brilliant Circle Holdings International's Debt?

As you can see below, at the end of June 2020, Brilliant Circle Holdings International had HK$671.6m of debt, up from HK$530.1m a year ago. Click the image for more detail. But it also has HK$726.2m in cash to offset that, meaning it has HK$54.6m net cash.

A Look At Brilliant Circle Holdings International's Liabilities

Zooming in on the latest balance sheet data, we can see that Brilliant Circle Holdings International had liabilities of HK$1.31b due within 12 months and liabilities of HK$86.1m due beyond that. On the other hand, it had cash of HK$726.2m and HK$743.8m worth of receivables due within a year. So it actually has HK$73.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Brilliant Circle Holdings International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Brilliant Circle Holdings International boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Brilliant Circle Holdings International has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Brilliant Circle Holdings International 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Brilliant Circle Holdings International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Brilliant Circle Holdings International generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Brilliant Circle Holdings International has HK$54.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in HK$209m. So we don't think Brilliant Circle Holdings International's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Brilliant Circle Holdings International you should be aware of, and 1 of them shouldn't be ignored.

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. 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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