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’. 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 note that Beijing Sports and Entertainment Industry Group Limited (HKG:1803) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
How Much Debt Does Beijing Sports and Entertainment Industry Group Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Beijing Sports and Entertainment Industry Group had debt of HK$31.2m, up from HK$1.2 in one year. But it also has HK$205.8m in cash to offset that, meaning it has HK$174.6m net cash.
How Strong Is Beijing Sports and Entertainment Industry Group’s Balance Sheet?
The latest balance sheet data shows that Beijing Sports and Entertainment Industry Group had liabilities of HK$161.4m due within a year, and liabilities of HK$54.6m falling due after that. On the other hand, it had cash of HK$205.8m and HK$133.2m worth of receivables due within a year. So it can boast HK$122.9m more liquid assets than total liabilities.
This surplus strongly suggests that Beijing Sports and Entertainment Industry Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Beijing Sports and Entertainment Industry Group boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Sports and Entertainment Industry Group’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.
In the last year Beijing Sports and Entertainment Industry Group had negative earnings before interest and tax, and actually shrunk its revenue by 26%, to HK$123m. To be frank that doesn’t bode well.
So How Risky Is Beijing Sports and Entertainment Industry Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Beijing Sports and Entertainment Industry Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$80m and booked a HK$66m accounting loss. But at least it has HK$174.6m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Beijing Sports and Entertainment Industry Group insider transactions.
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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