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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Best Food Holding Company Limited (HKG:1488) makes use of debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Best Food Holding
What Is Best Food Holding's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Best Food Holding had CN¥597.5m of debt, an increase on CN¥558.9m, over one year. However, it also had CN¥87.9m in cash, and so its net debt is CN¥509.6m.
How Healthy Is Best Food Holding's Balance Sheet?
The latest balance sheet data shows that Best Food Holding had liabilities of CN¥315.0m due within a year, and liabilities of CN¥788.7m falling due after that. Offsetting these obligations, it had cash of CN¥87.9m as well as receivables valued at CN¥73.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥942.2m.
This is a mountain of leverage relative to its market capitalization of CN¥1.12b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Best Food Holding 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, Best Food Holding made a loss at the EBIT level, and saw its revenue drop to CN¥584m, which is a fall of 11%. We would much prefer see growth.
Caveat Emptor
Not only did Best Food Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥34m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥64m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Best Food Holding is showing 1 warning sign in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.