Health Check: How Prudently Does Bar Pacific Group Holdings (HKG:8432) Use Debt?

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. We can see that Bar Pacific Group Holdings Limited (HKG:8432) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Bar Pacific Group Holdings

What Is Bar Pacific Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Bar Pacific Group Holdings had HK$60.0m of debt, an increase on HK$32.0m, over one year. However, because it has a cash reserve of HK$5.12m, its net debt is less, at about HK$54.9m.

How Strong Is Bar Pacific Group Holdings' Balance Sheet?

The latest balance sheet data shows that Bar Pacific Group Holdings had liabilities of HK$103.9m due within a year, and liabilities of HK$52.7m falling due after that. Offsetting these obligations, it had cash of HK$5.12m as well as receivables valued at HK$2.53m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$149.0m.

The deficiency here weighs heavily on the HK$46.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Bar Pacific Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bar Pacific Group Holdings 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.

In the last year Bar Pacific Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 46%, to HK$68m. That makes us nervous, to say the least.

Caveat Emptor

While Bar Pacific Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$40m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost HK$35m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Bar Pacific Group Holdings (2 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.