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.' 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. As with many other companies Beijing Gas Blue Sky Holdings Limited (HKG:6828) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Beijing Gas Blue Sky Holdings

How Much Debt Does Beijing Gas Blue Sky Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Beijing Gas Blue Sky Holdings had debt of HK$2.77b, up from HK$2.56b in one year. However, because it has a cash reserve of HK$514.6m, its net debt is less, at about HK$2.26b.

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

According to the last reported balance sheet, Beijing Gas Blue Sky Holdings had liabilities of HK$2.33b due within 12 months, and liabilities of HK$1.20b due beyond 12 months. On the other hand, it had cash of HK$514.6m and HK$157.4m worth of receivables due within a year. So its liabilities total HK$2.86b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$704.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Beijing Gas Blue Sky Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing Gas Blue Sky Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Beijing Gas Blue Sky Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Beijing Gas Blue Sky Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$164m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. 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 one might argue that there's still a chance it can get things on the right track. 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 3 warning signs for Beijing Gas Blue Sky Holdings you should be aware of, and 1 of them doesn't sit too well with us.

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.