Besunyen Holdings (HKG:926) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Besunyen Holdings Company Limited (HKG:926) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Besunyen Holdings

What Is Besunyen Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Besunyen Holdings had CN¥159.8m of debt, an increase on CN¥94.8m, over one year. But on the other hand it also has CN¥664.1m in cash, leading to a CN¥504.3m net cash position.

A Look At Besunyen Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Besunyen Holdings had liabilities of CN¥496.4m due within 12 months and liabilities of CN¥146.4m due beyond that. Offsetting this, it had CN¥664.1m in cash and CN¥154.3m in receivables that were due within 12 months. So it actually has CN¥175.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Besunyen Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Besunyen Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Besunyen Holdings turned things around in the last 12 months, delivering and EBIT of CN¥41m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Besunyen 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Besunyen Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Besunyen Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Besunyen Holdings has net cash of CN¥504.3m, as well as more liquid assets than liabilities. So we don't have any problem with Besunyen Holdings's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Besunyen Holdings you should know about.

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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This article by Simply Wall St is general in nature. 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.
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