Does Bright Real Estate GroupLimited (SHSE:600708) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Bright Real Estate Group Co.,Limited (SHSE:600708) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Bright Real Estate GroupLimited

How Much Debt Does Bright Real Estate GroupLimited Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Bright Real Estate GroupLimited had CN¥34.7b of debt, an increase on CN¥32.6b, over one year. On the flip side, it has CN¥5.25b in cash leading to net debt of about CN¥29.4b.

A Look At Bright Real Estate GroupLimited's Liabilities

Zooming in on the latest balance sheet data, we can see that Bright Real Estate GroupLimited had liabilities of CN¥21.8b due within 12 months and liabilities of CN¥29.9b due beyond that. On the other hand, it had cash of CN¥5.25b and CN¥9.76b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥36.6b.

The deficiency here weighs heavily on the CN¥5.53b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bright Real Estate GroupLimited would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Bright Real Estate GroupLimited shareholders face the double whammy of a high net debt to EBITDA ratio (189), and fairly weak interest coverage, since EBIT is just 0.21 times the interest expense. The debt burden here is substantial. Even worse, Bright Real Estate GroupLimited saw its EBIT tank 88% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bright Real Estate GroupLimited will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Bright Real Estate GroupLimited actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Bright Real Estate GroupLimited's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Taking into account all the aforementioned factors, it looks like Bright Real Estate GroupLimited has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Bright Real Estate GroupLimited (including 2 which make us 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.