Brainhole Technology (HKG:2203) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Brainhole Technology Limited (HKG:2203) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Brainhole Technology

What Is Brainhole Technology's Debt?

The image below, which you can click on for greater detail, shows that Brainhole Technology had debt of HK$61.3m at the end of June 2022, a reduction from HK$100.3m over a year. On the flip side, it has HK$34.6m in cash leading to net debt of about HK$26.7m.

How Healthy Is Brainhole Technology's Balance Sheet?

We can see from the most recent balance sheet that Brainhole Technology had liabilities of HK$136.6m falling due within a year, and liabilities of HK$57.1m due beyond that. Offsetting these obligations, it had cash of HK$34.6m as well as receivables valued at HK$129.8m due within 12 months. So it has liabilities totalling HK$29.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Brainhole Technology has a market capitalization of HK$120.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Brainhole Technology 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.

In the last year Brainhole Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 6.7%, to HK$327m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Brainhole Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$24m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$6.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Brainhole Technology (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.