Is Bonny International Holding (HKG:1906) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Bonny International Holding Limited (HKG:1906) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bonny International Holding

What Is Bonny International Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Bonny International Holding had debt of CN¥149.7m, up from CN¥95.2m in one year. On the flip side, it has CN¥7.23m in cash leading to net debt of about CN¥142.5m.

How Strong Is Bonny International Holding's Balance Sheet?

We can see from the most recent balance sheet that Bonny International Holding had liabilities of CN¥165.2m falling due within a year, and liabilities of CN¥92.6m due beyond that. Offsetting this, it had CN¥7.23m in cash and CN¥33.6m in receivables that were due within 12 months. So its liabilities total CN¥216.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Bonny International Holding is worth CN¥451.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bonny International Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Bonny International Holding made a loss at the EBIT level, and saw its revenue drop to CN¥210m, which is a fall of 20%. That's not what we would hope to see.

Caveat Emptor

While Bonny International Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥53m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥53m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Bonny International Holding is showing 3 warning signs in our investment analysis , and 2 of those are concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.