BExcellent Group Holdings (HKG:1775) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies BExcellent Group Holdings Limited (HKG:1775) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for BExcellent Group Holdings

What Is BExcellent Group Holdings's Net Debt?

As you can see below, at the end of January 2023, BExcellent Group Holdings had HK$54.8m of debt, up from HK$7.33m a year ago. Click the image for more detail. But it also has HK$113.4m in cash to offset that, meaning it has HK$58.6m net cash.

A Look At BExcellent Group Holdings' Liabilities

According to the last reported balance sheet, BExcellent Group Holdings had liabilities of HK$99.6m due within 12 months, and liabilities of HK$9.35m due beyond 12 months. Offsetting this, it had HK$113.4m in cash and HK$6.74m in receivables that were due within 12 months. So it actually has HK$11.2m more liquid assets than total liabilities.

This short term liquidity is a sign that BExcellent Group Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, BExcellent Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is BExcellent Group Holdings'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, BExcellent Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$131m, which is a fall of 24%. That makes us nervous, to say the least.

So How Risky Is BExcellent Group Holdings?

Although BExcellent Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$1.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for BExcellent Group Holdings (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.