Is Beijing Sports and Entertainment Industry Group (HKG:1803) Using Debt In A Risky Way?

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.' 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 Beijing Sports and Entertainment Industry Group Limited (HKG:1803) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Beijing Sports and Entertainment Industry Group

How Much Debt Does Beijing Sports and Entertainment Industry Group Carry?

As you can see below, Beijing Sports and Entertainment Industry Group had HK$37.4m of debt at December 2020, down from HK$56.1m a year prior. However, it does have HK$171.9m in cash offsetting this, leading to net cash of HK$134.5m.

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$197.3m due within 12 months and liabilities of HK$47.3m due beyond that. On the other hand, it had cash of HK$171.9m and HK$149.3m worth of receivables due within a year. So it actually has HK$76.7m more liquid assets than total liabilities.

This excess liquidity suggests that Beijing Sports and Entertainment Industry Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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. There's no doubt that we learn most about debt from the balance sheet. 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$121m, which is a fall of 31%. That makes us nervous, to say the least.

So How Risky Is Beijing Sports and Entertainment Industry 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 Beijing Sports and Entertainment Industry Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$75m and booked a HK$12m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$134.5m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Beijing Sports and Entertainment Industry Group you should be aware of, and 1 of them doesn't sit too well with us.

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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