Beijing Sports and Entertainment Industry Group (HKG:1803) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Beijing Sports and Entertainment Industry Group Limited (HKG:1803) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Sports and Entertainment Industry Group

What Is Beijing Sports and Entertainment Industry Group's Net Debt?

The image below, which you can click on for greater detail, shows that Beijing Sports and Entertainment Industry Group had debt of HK$32.1m at the end of June 2022, a reduction from HK$43.8m over a year. But it also has HK$126.5m in cash to offset that, meaning it has HK$94.4m net cash.

How Strong Is Beijing Sports and Entertainment Industry Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Sports and Entertainment Industry Group had liabilities of HK$126.1m due within 12 months and liabilities of HK$13.7m due beyond that. Offsetting these obligations, it had cash of HK$126.5m as well as receivables valued at HK$99.1m due within 12 months. So it actually has HK$85.9m more liquid assets than total liabilities.

This luscious liquidity implies that Beijing Sports and Entertainment Industry Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Beijing Sports and Entertainment Industry Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Sports and Entertainment Industry Group's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Beijing Sports and Entertainment Industry Group made a loss at the EBIT level, and saw its revenue drop to HK$153m, which is a fall of 20%. We would much prefer see growth.

So How Risky Is Beijing Sports and Entertainment Industry Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Beijing Sports and Entertainment Industry Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$36m of cash and made a loss of HK$55m. While this does make the company a bit risky, it's important to remember it has net cash of HK$94.4m. That means it could keep spending at its current rate for more than two years. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Beijing Sports and Entertainment Industry Group you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.