David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Boill Healthcare Holdings Limited (HKG:1246) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Boill Healthcare Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Boill Healthcare Holdings had HK$1.05b of debt in March 2019, down from HK$1.22b, one year before. On the flip side, it has HK$68.2m in cash leading to net debt of about HK$984.2m.
A Look At Boill Healthcare Holdings's Liabilities
We can see from the most recent balance sheet that Boill Healthcare Holdings had liabilities of HK$1.28b falling due within a year, and liabilities of HK$102.7m due beyond that. Offsetting this, it had HK$68.2m in cash and HK$26.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.29b.
The deficiency here weighs heavily on the HK$653.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Boill Healthcare Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Boill Healthcare 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.
Over 12 months, Boill Healthcare Holdings made a loss at the EBIT level, and saw its revenue drop to HK$420m, which is a fall of 43%. That makes us nervous, to say the least.
Not only did Boill Healthcare Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$103m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$200m. And until that time we think this is a risky stock. For riskier companies like Boill Healthcare Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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