Is Brainhole Technology (HKG:2203) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Brainhole Technology Limited (HKG:2203) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 Brainhole Technology

How Much Debt Does Brainhole Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Brainhole Technology had HK$35.7m of debt, an increase on HK$13.1m, over one year. However, it does have HK$64.1m in cash offsetting this, leading to net cash of HK$28.4m.

How Strong Is Brainhole Technology's Balance Sheet?

The latest balance sheet data shows that Brainhole Technology had liabilities of HK$164.8m due within a year, and liabilities of HK$5.18m falling due after that. Offsetting this, it had HK$64.1m in cash and HK$89.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$16.2m.

Of course, Brainhole Technology has a market capitalization of HK$232.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Brainhole Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Brainhole Technology'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, Brainhole Technology made a loss at the EBIT level, and saw its revenue drop to HK$280m, which is a fall of 28%. To be frank that doesn't bode well.

So How Risky Is Brainhole Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Brainhole Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$11m of cash and made a loss of HK$74m. With only HK$28.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 2 warning signs for Brainhole Technology (1 can't be ignored!) that you should be aware of before investing here.

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. 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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