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. Importantly, Brainhole Technology Limited (HKG:2203) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Brainhole Technology

How Much Debt Does Brainhole Technology Carry?

As you can see below, at the end of June 2024, Brainhole Technology had HK$161.6m of debt, up from HK$139.8m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$143.5m, its net debt is less, at about HK$18.1m.

A Look At Brainhole Technology's Liabilities

We can see from the most recent balance sheet that Brainhole Technology had liabilities of HK$121.3m falling due within a year, and liabilities of HK$115.8m due beyond that. Offsetting these obligations, it had cash of HK$143.5m as well as receivables valued at HK$75.8m due within 12 months. So its liabilities total HK$17.7m more than the combination of its cash and short-term receivables.

Brainhole Technology has a market capitalization of HK$54.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Brainhole Technology'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.

Over 12 months, Brainhole Technology made a loss at the EBIT level, and saw its revenue drop to HK$171m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Brainhole Technology'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 HK$40m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$17m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Brainhole Technology is showing 2 warning signs in our investment analysis , you should know about...

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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