Is Qian Hu (SGX:BCV) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Qian Hu Corporation Limited (SGX:BCV) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Qian Hu

What Is Qian Hu's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Qian Hu had S$5.00m of debt in December 2023, down from S$9.03m, one year before. However, it does have S$17.6m in cash offsetting this, leading to net cash of S$12.6m.

A Look At Qian Hu's Liabilities

The latest balance sheet data shows that Qian Hu had liabilities of S$15.6m due within a year, and liabilities of S$1.61m falling due after that. On the other hand, it had cash of S$17.6m and S$11.7m worth of receivables due within a year. So it can boast S$12.1m more liquid assets than total liabilities.

This luscious liquidity implies that Qian Hu's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Qian Hu has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Qian Hu 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.

In the last year Qian Hu had a loss before interest and tax, and actually shrunk its revenue by 6.6%, to S$70m. That's not what we would hope to see.

So How Risky Is Qian Hu?

Although Qian Hu had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$1.8m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 Qian Hu (at least 2 which don't sit too well with us) , 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.

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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.