Does Beijing Gas Blue Sky Holdings (HKG:6828) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Beijing Gas Blue Sky Holdings Limited (HKG:6828) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Gas Blue Sky Holdings

What Is Beijing Gas Blue Sky Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Beijing Gas Blue Sky Holdings had HK$2.77b of debt, an increase on HK$2.56b, over one year. However, it does have HK$514.6m in cash offsetting this, leading to net debt of about HK$2.26b.

How Strong Is Beijing Gas Blue Sky Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Gas Blue Sky Holdings had liabilities of HK$2.33b due within 12 months and liabilities of HK$1.20b due beyond that. Offsetting these obligations, it had cash of HK$514.6m as well as receivables valued at HK$157.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.86b.

The deficiency here weighs heavily on the HK$886.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Beijing Gas Blue Sky Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Gas Blue Sky Holdings'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 Beijing Gas Blue Sky Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Beijing Gas Blue Sky Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$164m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of HK$6.0m and the profit of HK$114m. So there is arguably potential that the company is going to turn things around. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Beijing Gas Blue Sky Holdings has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.