Health Check: How Prudently Does Besunyen Holdings (HKG:926) Use Debt?

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. 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. Importantly, Besunyen Holdings Company Limited (HKG:926) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Besunyen Holdings

What Is Besunyen Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Besunyen Holdings had CN¥81.0m of debt in June 2019, down from CN¥150.0m, one year before. However, it does have CN¥421.6m in cash offsetting this, leading to net cash of CN¥340.6m.

How Healthy Is Besunyen Holdings's Balance Sheet?

We can see from the most recent balance sheet that Besunyen Holdings had liabilities of CN¥242.4m falling due within a year, and liabilities of CN¥94.4m due beyond that. Offsetting this, it had CN¥421.6m in cash and CN¥118.6m in receivables that were due within 12 months. So it can boast CN¥203.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Besunyen Holdings's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Besunyen Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Besunyen Holdings 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.

In the last year Besunyen Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to CN¥549m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Besunyen Holdings?

Although Besunyen Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of CN¥98m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Keeping in mind its 30% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Besunyen Holdings that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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