Is BC Technology Group (HKG:863) Using Too Much 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.' 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 BC Technology Group Limited (HKG:863) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BC Technology Group

How Much Debt Does BC Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 BC Technology Group had CN¥477.9m of debt, an increase on CN¥351.7m, over one year. On the flip side, it has CN¥348.9m in cash leading to net debt of about CN¥129.0m.

How Healthy Is BC Technology Group's Balance Sheet?

We can see from the most recent balance sheet that BC Technology Group had liabilities of CN¥3.06b falling due within a year, and liabilities of CN¥216.7m due beyond that. Offsetting this, it had CN¥348.9m in cash and CN¥22.9m in receivables that were due within 12 months. So its liabilities total CN¥2.90b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because BC Technology Group is worth CN¥5.04b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is BC Technology Group'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.

In the last year BC Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to CN¥217m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though BC Technology Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥227m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥250m. So we do think this stock is quite risky. 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 BC Technology Group is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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