Is Bar Pacific Group Holdings (HKG:8432) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Bar Pacific Group Holdings Limited (HKG:8432) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bar Pacific Group Holdings

What Is Bar Pacific Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Bar Pacific Group Holdings had debt of HK$52.7m, up from HK$32.4m in one year. However, it also had HK$3.51m in cash, and so its net debt is HK$49.2m.

How Strong Is Bar Pacific Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Bar Pacific Group Holdings had liabilities of HK$89.7m falling due within a year, and liabilities of HK$43.9m due beyond that. On the other hand, it had cash of HK$3.51m and HK$1.55m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$128.5m.

The deficiency here weighs heavily on the HK$67.1m 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 definitely think shareholders need to watch this one closely. 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 65%, to HK$59m. 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$49m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of HK$20m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For example - Bar Pacific Group Holdings has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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