Does Birmingham Sports Holdings (HKG:2309) Have A 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.' 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. Importantly, Birmingham Sports Holdings Limited (HKG:2309) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Birmingham Sports Holdings

What Is Birmingham Sports Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Birmingham Sports Holdings had debt of HK$507.1m, up from HK$487.4m in one year. However, it also had HK$44.9m in cash, and so its net debt is HK$462.3m.

A Look At Birmingham Sports Holdings' Liabilities

According to the last reported balance sheet, Birmingham Sports Holdings had liabilities of HK$547.6m due within 12 months, and liabilities of HK$224.3m due beyond 12 months. Offsetting this, it had HK$44.9m in cash and HK$226.8m in receivables that were due within 12 months. So it has liabilities totalling HK$500.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Birmingham Sports Holdings has a market capitalization of HK$2.06b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Birmingham Sports Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Birmingham Sports Holdings made a loss at the EBIT level, and saw its revenue drop to HK$165m, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

While Birmingham Sports 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$389m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$190m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Birmingham Sports Holdings you should be aware of, and 2 of them are a bit concerning.

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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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.