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

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.' 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 note that Beijing Sports and Entertainment Industry Group Limited (HKG:1803) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Debt?

As you can see below, Beijing Sports and Entertainment Industry Group had HK$43.8m of debt at June 2021, down from HK$55.3m a year prior. But it also has HK$172.8m in cash to offset that, meaning it has HK$128.9m net cash.

A Look At Beijing Sports and Entertainment Industry Group's Liabilities

According to the last reported balance sheet, Beijing Sports and Entertainment Industry Group had liabilities of HK$233.6m due within 12 months, and liabilities of HK$39.1m due beyond 12 months. Offsetting these obligations, it had cash of HK$172.8m as well as receivables valued at HK$156.2m due within 12 months. So it can boast HK$56.2m more liquid assets than total liabilities.

This surplus suggests that Beijing Sports and Entertainment Industry Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Beijing Sports and Entertainment Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Beijing Sports and Entertainment Industry Group wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to HK$191m. We usually like to see faster growth from unprofitable companies, but each to their own.

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 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. And over the same period it saw negative free cash outflow of HK$28m and booked a HK$3.2m accounting loss. But the saving grace is the HK$128.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. 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.
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