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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.' 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 Bilibili Inc. (NASDAQ:BILI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Bilibili's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Bilibili had debt of CN¥8.44b, up from CN¥3.41b in one year. However, its balance sheet shows it holds CN¥12.8b in cash, so it actually has CN¥4.37b net cash.
How Strong Is Bilibili's Balance Sheet?
The latest balance sheet data shows that Bilibili had liabilities of CN¥7.39b due within a year, and liabilities of CN¥8.69b falling due after that. Offsetting these obligations, it had cash of CN¥12.8b as well as receivables valued at CN¥1.41b due within 12 months. So it has liabilities totalling CN¥1.86b more than its cash and near-term receivables, combined.
Having regard to Bilibili's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥226.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Bilibili also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bilibili's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Bilibili reported revenue of CN¥12b, which is a gain of 77%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Bilibili?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Bilibili lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥1.5b of cash and made a loss of CN¥3.0b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥4.37b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Bilibili may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Bilibili you should know about.
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.
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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