Does Greenland Holdings (SHSE:600606) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Greenland Holdings Corporation Limited (SHSE:600606) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Greenland Holdings

How Much Debt Does Greenland Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Greenland Holdings had debt of CN¥222.1b, up from CN¥210.8b in one year. However, because it has a cash reserve of CN¥31.6b, its net debt is less, at about CN¥190.5b.

A Look At Greenland Holdings' Liabilities

The latest balance sheet data shows that Greenland Holdings had liabilities of CN¥795.7b due within a year, and liabilities of CN¥130.1b falling due after that. On the other hand, it had cash of CN¥31.6b and CN¥314.8b worth of receivables due within a year. So its liabilities total CN¥579.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥27.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Greenland Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Greenland 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.

Over 12 months, Greenland Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥267b, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

While Greenland Holdings'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¥1.4b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated CN¥9.1b of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Greenland Holdings has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.