Bingo Group Holdings (HKG:8220) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Bingo Group Holdings Limited (HKG:8220) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bingo Group Holdings

How Much Debt Does Bingo Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Bingo Group Holdings had HK$13.8m of debt in March 2021, down from HK$21.5m, one year before. But it also has HK$16.1m in cash to offset that, meaning it has HK$2.33m net cash.

How Strong Is Bingo Group Holdings' Balance Sheet?

The latest balance sheet data shows that Bingo Group Holdings had liabilities of HK$15.1m due within a year, and liabilities of HK$20.0m falling due after that. Offsetting this, it had HK$16.1m in cash and HK$770.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$18.3m.

While this might seem like a lot, it is not so bad since Bingo Group Holdings has a market capitalization of HK$60.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Bingo Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bingo Group 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 Bingo Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 70%, to HK$6.9m. That makes us nervous, to say the least.

So How Risky Is Bingo Group Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Bingo Group Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$13m and booked a HK$21m accounting loss. But at least it has HK$2.33m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Bingo Group Holdings you should be aware of, and 3 of them shouldn't be ignored.

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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