Is Bonvests Holdings (SGX:B28) Using Debt In A Risky Way?

Warren Buffett famously said, '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. Importantly, Bonvests Holdings Limited (SGX:B28) does carry debt. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Bonvests Holdings

What Is Bonvests Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Bonvests Holdings had S$385.3m of debt, an increase on S$356.1m, over one year. However, because it has a cash reserve of S$36.2m, its net debt is less, at about S$349.0m.

How Healthy Is Bonvests Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bonvests Holdings had liabilities of S$210.7m due within 12 months and liabilities of S$267.0m due beyond that. Offsetting this, it had S$36.2m in cash and S$23.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$418.0m.

When you consider that this deficiency exceeds the company's S$413.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bonvests 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.

Over 12 months, Bonvests Holdings made a loss at the EBIT level, and saw its revenue drop to S$111m, which is a fall of 42%. That makes us nervous, to say the least.

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$32m. 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$19m 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. For example - Bonvests Holdings has 2 warning signs we think you should be aware of.

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.
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