Is Bingo Group Holdings (HKG:8220) Using Debt Sensibly?

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. As with many other companies Bingo Group Holdings Limited (HKG:8220) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider 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$12.7m at the end of September 2020, a reduction from HK$26.8m over a year. However, its balance sheet shows it holds HK$21.2m in cash, so it actually has HK$8.49m net cash.

How Strong Is Bingo Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Bingo Group Holdings had liabilities of HK$14.1m falling due within a year, and liabilities of HK$19.5m due beyond that. Offsetting this, it had HK$21.2m in cash and HK$5.92m in receivables that were due within 12 months. So it has liabilities totalling HK$6.46m more than its cash and near-term receivables, combined.

Of course, Bingo Group Holdings has a market capitalization of HK$71.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Bingo Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Bingo Group 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, Bingo Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$8.7m, which is a fall of 74%. To be frank that doesn't bode well.

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. Indeed, in that time it burnt through HK$31m of cash and made a loss of HK$43m. But at least it has HK$8.49m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Bingo Group Holdings is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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. 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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