BetterLife Holding (HKG:6909) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, BetterLife Holding Limited (HKG:6909) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for BetterLife Holding

What Is BetterLife Holding's Net Debt?

The image below, which you can click on for greater detail, shows that BetterLife Holding had debt of CN¥373.9m at the end of June 2024, a reduction from CN¥1.05b over a year. But it also has CN¥1.14b in cash to offset that, meaning it has CN¥766.1m net cash.

How Healthy Is BetterLife Holding's Balance Sheet?

According to the last reported balance sheet, BetterLife Holding had liabilities of CN¥1.33b due within 12 months, and liabilities of CN¥574.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.14b as well as receivables valued at CN¥394.1m due within 12 months. So its liabilities total CN¥367.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥446.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, BetterLife Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that BetterLife Holding has seen its EBIT plunge 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since BetterLife Holding will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While BetterLife Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, BetterLife Holding produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While BetterLife Holding does have more liabilities than liquid assets, it also has net cash of CN¥766.1m. So while BetterLife Holding does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for BetterLife Holding you should be aware of, and 1 of them is potentially serious.

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.