Is Bradaverse Education (Int'l) Investments Group (HKG:1082) 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.' 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. We can see that Bradaverse Education (Int'l) Investments Group Limited (HKG:1082) does use debt in its business. But the real question is whether this debt is making the company risky.

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, 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.

See our latest analysis for Bradaverse Education (Int'l) Investments Group

How Much Debt Does Bradaverse Education (Int'l) Investments Group Carry?

As you can see below, Bradaverse Education (Int'l) Investments Group had HK$17.0m of debt at June 2024, down from HK$21.1m a year prior. But it also has HK$49.4m in cash to offset that, meaning it has HK$32.4m net cash.

A Look At Bradaverse Education (Int'l) Investments Group's Liabilities

We can see from the most recent balance sheet that Bradaverse Education (Int'l) Investments Group had liabilities of HK$17.9m falling due within a year, and liabilities of HK$20.1m due beyond that. Offsetting this, it had HK$49.4m in cash and HK$42.0m in receivables that were due within 12 months. So it actually has HK$53.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Bradaverse Education (Int'l) Investments Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Bradaverse Education (Int'l) Investments Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bradaverse Education (Int'l) Investments Group 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 Bradaverse Education (Int'l) Investments Group wasn't profitable at an EBIT level, but managed to grow its revenue by 5.6%, to HK$126m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Bradaverse Education (Int'l) Investments Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Bradaverse Education (Int'l) Investments Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$14m of cash and made a loss of HK$28m. While this does make the company a bit risky, it's important to remember it has net cash of HK$32.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Bradaverse Education (Int'l) Investments Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.