Is Bar Pacific Group Holdings (HKG:8432) Using Debt In A Risky Way?

Warren Buffett famously said, '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 note that Bar Pacific Group Holdings Limited (HKG:8432) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Bar Pacific Group Holdings

How Much Debt Does Bar Pacific Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Bar Pacific Group Holdings had HK$137.6m of debt, an increase on HK$52.7m, over one year. However, it does have HK$5.12m in cash offsetting this, leading to net debt of about HK$132.5m.

How Healthy Is Bar Pacific Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bar Pacific Group Holdings had liabilities of HK$103.9m due within 12 months and liabilities of HK$52.7m due beyond that. Offsetting this, it had HK$5.12m in cash and HK$2.53m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$149.0m.

This deficit casts a shadow over the HK$51.6m company, like a colossus towering over mere mortals. 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. There's no doubt that we learn most about debt from the balance sheet. But it is Bar Pacific Group Holdings'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.

In the last year Bar Pacific Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 8.1%, to HK$93m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Bar Pacific Group Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$41m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$29m in the last year. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Bar Pacific Group Holdings that you should be aware of.

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.