We Think Birmingham Sports Holdings (HKG:2309) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Birmingham Sports Holdings Limited (HKG:2309) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Birmingham Sports Holdings

What Is Birmingham Sports Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Birmingham Sports Holdings had HK$487.1m of debt in December 2021, down from HK$638.0m, one year before. However, it does have HK$259.3m in cash offsetting this, leading to net debt of about HK$227.8m.

How Strong Is Birmingham Sports Holdings' Balance Sheet?

According to the last reported balance sheet, Birmingham Sports Holdings had liabilities of HK$463.5m due within 12 months, and liabilities of HK$260.1m due beyond 12 months. Offsetting this, it had HK$259.3m in cash and HK$16.7m in receivables that were due within 12 months. So it has liabilities totalling HK$447.7m more than its cash and near-term receivables, combined.

Birmingham Sports Holdings has a market capitalization of HK$1.97b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 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.

In the last year Birmingham Sports Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to HK$203m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Birmingham Sports Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$387m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$190m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 2 warning signs for Birmingham Sports Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

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.