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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Beijing Sports and Entertainment Industry Group Limited (HKG:1803) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

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

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Beijing Sports and Entertainment Industry Group had HK$50.2m of debt, an increase on HK$24.1m, over one year. However, it does have HK$92.6m in cash offsetting this, leading to net cash of HK$42.4m.

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

We can see from the most recent balance sheet that Beijing Sports and Entertainment Industry Group had liabilities of HK$263.5m falling due within a year, and liabilities of HK$6.36m due beyond that. Offsetting these obligations, it had cash of HK$92.6m as well as receivables valued at HK$88.1m due within 12 months. So it has liabilities totalling HK$89.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$140.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, 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 it is Beijing Sports and Entertainment Industry Group'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.

View our latest analysis for Beijing Sports and Entertainment Industry Group

Over 12 months, Beijing Sports and Entertainment Industry Group reported revenue of HK$170m, which is a gain of 172%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Beijing Sports and Entertainment Industry Group?

While Beijing Sports and Entertainment Industry Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$12m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Beijing Sports and Entertainment Industry Group is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. For example, we've discovered 3 warning signs for Beijing Sports and Entertainment Industry Group (1 is concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.