Is Beijing Gas Blue Sky Holdings (HKG:6828) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Beijing Gas Blue Sky Holdings Limited (HKG:6828) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Gas Blue Sky Holdings's Net Debt?

As you can see below, Beijing Gas Blue Sky Holdings had HK$2.33b of debt at December 2024, down from HK$2.46b a year prior. However, because it has a cash reserve of HK$360.4m, its net debt is less, at about HK$1.97b.

How Healthy Is Beijing Gas Blue Sky Holdings' Balance Sheet?

We can see from the most recent balance sheet that Beijing Gas Blue Sky Holdings had liabilities of HK$2.87b falling due within a year, and liabilities of HK$98.9m due beyond that. Offsetting this, it had HK$360.4m in cash and HK$184.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.43b.

This deficit casts a shadow over the HK$1.05b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Beijing Gas Blue Sky Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Gas Blue Sky Holdings'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.

View our latest analysis for Beijing Gas Blue Sky Holdings

In the last year Beijing Gas Blue Sky Holdings had a loss before interest and tax, and actually shrunk its revenue by 13%, to HK$1.7b. We would much prefer see growth.

Caveat Emptor

Not only did Beijing Gas Blue Sky Holdings'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 HK$98m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$24m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Beijing Gas Blue Sky Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.