Does BOE Varitronix (HKG:710) Have A Healthy Balance Sheet?

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 note that BOE Varitronix Limited (HKG:710) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for BOE Varitronix

What Is BOE Varitronix's Debt?

As you can see below, at the end of December 2022, BOE Varitronix had HK$667.2m of debt, up from none a year ago. Click the image for more detail. But it also has HK$2.94b in cash to offset that, meaning it has HK$2.28b net cash.

How Strong Is BOE Varitronix's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BOE Varitronix had liabilities of HK$4.10b due within 12 months and liabilities of HK$64.2m due beyond that. On the other hand, it had cash of HK$2.94b and HK$2.08b worth of receivables due within a year. So it can boast HK$851.8m more liquid assets than total liabilities.

This surplus suggests that BOE Varitronix has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BOE Varitronix boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, BOE Varitronix grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BOE Varitronix's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. BOE Varitronix may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, BOE Varitronix recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case BOE Varitronix has HK$2.28b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 88% over the last year. So we don't think BOE Varitronix's use of debt is 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 instance, we've identified 2 warning signs for BOE Varitronix (1 is concerning) you should be aware of.

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. 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.