Is Boer Power Holdings (HKG:1685) Using Debt Sensibly?
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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Boer Power Holdings Limited (HKG:1685) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Boer Power Holdings
How Much Debt Does Boer Power Holdings Carry?
As you can see below, Boer Power Holdings had CN¥1.17b of debt at December 2018, down from CN¥1.55b a year prior. And it doesn't have much cash, so its net debt is about the same.
A Look At Boer Power Holdings's Liabilities
According to the last reported balance sheet, Boer Power Holdings had liabilities of CN¥1.10b due within 12 months, and liabilities of CN¥507.2m due beyond 12 months. Offsetting this, it had CN¥9.73m in cash and CN¥743.0m in receivables that were due within 12 months. So its liabilities total CN¥852.4m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥240.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Boer Power Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Boer Power 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, Boer Power Holdings saw its revenue drop to CN¥628m, which is a fall of 17%. We would much prefer see growth.
Caveat Emptor
Not only did Boer Power Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥925m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CN¥958m in just last twelve months, and it doesn't have much by way of liquid assets. So while it will probably survive, we think it's risky; we'd treat it like chicken pox and try to avoid it. For riskier companies like Boer Power 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.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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. Thank you for reading.
