Is BabyTree Group (HKG:1761) Weighed On By Its Debt Load?

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.' 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 can see that BabyTree Group (HKG:1761) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for BabyTree Group

What Is BabyTree Group's Net Debt?

The image below, which you can click on for greater detail, shows that BabyTree Group had debt of CN¥19.5m at the end of June 2021, a reduction from CN¥106.6m over a year. However, its balance sheet shows it holds CN¥1.50b in cash, so it actually has CN¥1.49b net cash.

How Strong Is BabyTree Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BabyTree Group had liabilities of CN¥134.1m due within 12 months and liabilities of CN¥12.7m due beyond that. On the other hand, it had cash of CN¥1.50b and CN¥403.8m worth of receivables due within a year. So it actually has CN¥1.76b more liquid assets than total liabilities.

This luscious liquidity implies that BabyTree Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, BabyTree Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since BabyTree Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year BabyTree Group wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥254m. With any luck the company will be able to grow its way to profitability.

So How Risky Is BabyTree Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that BabyTree Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥542m of cash and made a loss of CN¥420m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.49b. That means it could keep spending at its current rate for more than two years. BabyTree Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that BabyTree Group is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.