Birmingham Sports Holdings (HKG:2309) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Birmingham Sports Holdings Limited (HKG:2309) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Birmingham Sports Holdings

How Much Debt Does Birmingham Sports Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Birmingham Sports Holdings had HK$487.4m of debt, an increase on HK$209.9m, over one year. However, it also had HK$44.5m in cash, and so its net debt is HK$442.9m.

A Look At Birmingham Sports Holdings's Liabilities

We can see from the most recent balance sheet that Birmingham Sports Holdings had liabilities of HK$685.5m falling due within a year, and liabilities of HK$75.8m due beyond that. On the other hand, it had cash of HK$44.5m and HK$66.7m worth of receivables due within a year. So it has liabilities totalling HK$650.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Birmingham Sports Holdings is worth HK$2.85b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Birmingham Sports Holdings 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.

Over 12 months, Birmingham Sports Holdings reported revenue of HK$232m, which is a gain of 10.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Birmingham Sports Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$357m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$251m of cash over the last year. So suffice it to say we consider the stock very 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. Take risks, for example - Birmingham Sports Holdings has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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