Bonny International Holding (HKG:1906) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bonny International Holding Limited (HKG:1906) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bonny International Holding

How Much Debt Does Bonny International Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Bonny International Holding had CN¥95.2m of debt in June 2021, down from CN¥227.8m, one year before. However, because it has a cash reserve of CN¥8.53m, its net debt is less, at about CN¥86.6m.

A Look At Bonny International Holding's Liabilities

We can see from the most recent balance sheet that Bonny International Holding had liabilities of CN¥210.4m falling due within a year, and liabilities of CN¥1.32m due beyond that. Offsetting this, it had CN¥8.53m in cash and CN¥66.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥136.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Bonny International Holding has a market capitalization of CN¥519.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bonny International Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Bonny International Holding had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥261m. That's not what we would hope to see.

Caveat Emptor

Not only did Bonny International Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥32m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥19m of cash over the last year. So to be blunt we think it 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 3 warning signs for Bonny International Holding you should be aware of.

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.