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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Gree Real Estate Co.,Ltd (SHSE:600185) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Gree Real EstateLtd
What Is Gree Real EstateLtd's Net Debt?
As you can see below, Gree Real EstateLtd had CN¥12.2b of debt at September 2024, down from CN¥13.2b a year prior. However, it does have CN¥886.7m in cash offsetting this, leading to net debt of about CN¥11.3b.
A Look At Gree Real EstateLtd's Liabilities
The latest balance sheet data shows that Gree Real EstateLtd had liabilities of CN¥13.3b due within a year, and liabilities of CN¥6.00b falling due after that. Offsetting this, it had CN¥886.7m in cash and CN¥235.6m in receivables that were due within 12 months. So its liabilities total CN¥18.1b more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of CN¥13.5b, we think shareholders really should watch Gree Real EstateLtd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gree Real EstateLtd will need earnings to service that debt. 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, Gree Real EstateLtd reported revenue of CN¥4.5b, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Gree Real EstateLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥274m at the EBIT level. 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. It's fair to say the loss of CN¥1.3b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Gree Real EstateLtd 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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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.
About SHSE:600185
Imperfect balance sheet very low.
