Bonvests Holdings (SGX:B28) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Bonvests Holdings Limited (SGX:B28) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bonvests Holdings

What Is Bonvests Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Bonvests Holdings had debt of S$375.5m, up from S$339.5m in one year. However, it does have S$38.6m in cash offsetting this, leading to net debt of about S$336.9m.

A Look At Bonvests Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Bonvests Holdings had liabilities of S$211.2m due within 12 months and liabilities of S$266.8m due beyond that. On the other hand, it had cash of S$38.6m and S$30.4m worth of receivables due within a year. So its liabilities total S$409.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of S$361.4m, we think shareholders really should watch Bonvests Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bonvests 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, Bonvests Holdings made a loss at the EBIT level, and saw its revenue drop to S$139m, which is a fall of 39%. To be frank that doesn't bode well.

Caveat Emptor

While Bonvests Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at S$34m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through S$11m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Bonvests Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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