Stock Analysis

Is BH Global (SGX:BQN) A Risky Investment?

SGX:BQN
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Warren Buffett famously said, '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 can see that BH Global Corporation Limited (SGX:BQN) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BH Global

What Is BH Global's Debt?

You can click the graphic below for the historical numbers, but it shows that BH Global had S$7.65m of debt in December 2021, down from S$13.5m, one year before. But on the other hand it also has S$9.60m in cash, leading to a S$1.96m net cash position.

debt-equity-history-analysis
SGX:BQN Debt to Equity History February 28th 2022

How Strong Is BH Global's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BH Global had liabilities of S$17.8m due within 12 months and liabilities of S$13.2m due beyond that. Offsetting this, it had S$9.60m in cash and S$15.1m in receivables that were due within 12 months. So its liabilities total S$6.26m more than the combination of its cash and short-term receivables.

Of course, BH Global has a market capitalization of S$63.0m, 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, BH Global also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact BH Global's saving grace is its low debt levels, because its EBIT has tanked 62% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BH Global 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While BH Global has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, BH Global actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that BH Global has S$1.96m in net cash. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in S$5.7m. So we are not troubled with BH Global's debt use. 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. We've identified 3 warning signs with BH Global , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether BH Global is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.