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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that BaWang International (Group) Holding Limited (HKG:1338) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for BaWang International (Group) Holding
What Is BaWang International (Group) Holding's Net Debt?
You can click the graphic below for the historical numbers, but it shows that BaWang International (Group) Holding had CN¥9.65m of debt in June 2019, down from CN¥12.6m, one year before. But on the other hand it also has CN¥73.3m in cash, leading to a CN¥63.6m net cash position.
How Strong Is BaWang International (Group) Holding's Balance Sheet?
The latest balance sheet data shows that BaWang International (Group) Holding had liabilities of CN¥109.6m due within a year, and liabilities of CN¥2.90m falling due after that. Offsetting this, it had CN¥73.3m in cash and CN¥19.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥20.0m.
Since publicly traded BaWang International (Group) Holding shares are worth a total of CN¥264.1m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, BaWang International (Group) Holding boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is BaWang International (Group) Holding's earnings that will influence how the balance sheet holds up in the future. 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.