Is Beijing Sports and Entertainment Industry Group (HKG:1803) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Beijing Sports and Entertainment Industry Group

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

You can click the graphic below for the historical numbers, but it shows that Beijing Sports and Entertainment Industry Group had HK$21.8m of debt in June 2023, down from HK$32.1m, one year before. However, its balance sheet shows it holds HK$94.3m in cash, so it actually has HK$72.5m 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$112.6m due within 12 months and liabilities of HK$5.01m due beyond that. Offsetting this, it had HK$94.3m in cash and HK$52.4m in receivables that were due within 12 months. So it can boast HK$29.0m more liquid assets than total liabilities.

This surplus suggests that Beijing Sports and Entertainment Industry Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Sports and Entertainment Industry Group will need earnings to service that debt. 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$90m, which is a fall of 41%. To be frank that doesn't bode well.

So How Risky Is Beijing Sports and Entertainment Industry Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$46m and booked a HK$62m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$72.5m. 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. 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. We've identified 3 warning signs with Beijing Sports and Entertainment Industry Group (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.