We Think LingNan Eco&Culture-TourismLtd (SZSE:002717) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for LingNan Eco&Culture-TourismLtd

What Is LingNan Eco&Culture-TourismLtd's Debt?

The image below, which you can click on for greater detail, shows that LingNan Eco&Culture-TourismLtd had debt of CN¥4.15b at the end of September 2024, a reduction from CN¥4.36b over a year. However, because it has a cash reserve of CN¥165.8m, its net debt is less, at about CN¥3.99b.

A Look At LingNan Eco&Culture-TourismLtd's Liabilities

The latest balance sheet data shows that LingNan Eco&Culture-TourismLtd had liabilities of CN¥11.9b due within a year, and liabilities of CN¥743.7m falling due after that. Offsetting this, it had CN¥165.8m in cash and CN¥8.60b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.91b.

This deficit isn't so bad because LingNan Eco&Culture-TourismLtd is worth CN¥7.50b, and thus could probably raise enough capital to shore up 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. There's no doubt that we learn most about debt from the balance sheet. But it is LingNan Eco&Culture-TourismLtd'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, LingNan Eco&Culture-TourismLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 48%. To be frank that doesn't bode well.

Caveat Emptor

While LingNan Eco&Culture-TourismLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥571m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥322m of cash over the last year. So to be blunt we think it is 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 LingNan Eco&Culture-TourismLtd is showing 4 warning signs in our investment analysis , and 3 of those are potentially serious...

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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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.