Health Check: How Prudently Does Bingo Group Holdings (HKG:8220) Use Debt?

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. We note that Bingo Group Holdings Limited (HKG:8220) does have debt on its balance sheet. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Bingo Group Holdings

What Is Bingo Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that Bingo Group Holdings had debt of HK$12.3m at the end of September 2022, a reduction from HK$14.8m over a year. However, it does have HK$26.7m in cash offsetting this, leading to net cash of HK$14.4m.

A Look At Bingo Group Holdings' Liabilities

According to the last reported balance sheet, Bingo Group Holdings had liabilities of HK$12.3m due within 12 months, and liabilities of HK$15.6m due beyond 12 months. Offsetting this, it had HK$26.7m in cash and HK$635.0k in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Given Bingo Group Holdings has a market capitalization of HK$19.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bingo Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bingo Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Bingo Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$6.9m, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Bingo Group Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Bingo Group Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$3.4m of cash and made a loss of HK$12m. However, it has net cash of HK$14.4m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Bingo Group Holdings .

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. 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.