Is Bison Finance Group (HKG: 888) Using Too Much Debt?
David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Bison Financial Group Limited (HKG: 888) has debt on its balance sheet. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
Check out our latest analysis for Bison Finance Group
How much debt does Bison Finance Group have?
As you can see below, Bison Finance Group had a debt of HK $ 91.7million in June 2021, up from HK $ 194.0million the previous year. But on the other hand, he also has HK $ 187.2million in cash, which leads to a net cash position of HK $ 95.5million.
A look at the liabilities of Bison Finance Group
The latest balance sheet data shows that Bison Finance Group had debts of HK $ 177.6 million due within one year, and debts of HK $ 7.72 million due thereafter. In compensation for these obligations, he had cash of HK $ 187.2 million as well as receivables valued at HK $ 114.8 million due within 12 months. So he actually has HK $ 116.7million Following liquid assets as total liabilities.
This surplus strongly suggests that Bison Finance Group has a rock solid balance sheet (and debt is not of concern). Given this fact, we believe its track record is as strong as an ox. In short, Bison Finance Group has net cash, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Bison Finance Group will need profits to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, Bison Finance Group has incurred a loss before interest and taxes and has actually reduced its revenue by 82%, to HK $ 91 million. It makes us nervous, to say the least.
So how risky is Bison Finance Group?
Although Bison Finance Group recorded a loss of earnings before interest and taxes (EBIT) in the last twelve months, it generated positive free cash flow of HK $ 71 million. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. We will feel more comfortable with the stock once EBIT is positive, given the weak revenue growth. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Bison Finance Group displays 3 warning signs in our investment analysis , and 1 of them cannot be ignored …
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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