These 4 Measures Indicate That Hangzhou Binjiang Real Estate GroupLtd (SZSE:002244) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Hangzhou Binjiang Real Estate Group Co.,Ltd (SZSE:002244) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hangzhou Binjiang Real Estate GroupLtd

What Is Hangzhou Binjiang Real Estate GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that Hangzhou Binjiang Real Estate GroupLtd had debt of CN¥64.2b at the end of June 2024, a reduction from CN¥68.3b over a year. However, it also had CN¥26.7b in cash, and so its net debt is CN¥37.5b.

How Healthy Is Hangzhou Binjiang Real Estate GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Binjiang Real Estate GroupLtd had liabilities of CN¥194.1b falling due within a year, and liabilities of CN¥30.1b due beyond that. Offsetting these obligations, it had cash of CN¥26.7b as well as receivables valued at CN¥35.8b due within 12 months. So it has liabilities totalling CN¥161.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥27.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hangzhou Binjiang Real Estate GroupLtd would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). 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).

Strangely Hangzhou Binjiang Real Estate GroupLtd has a sky high EBITDA ratio of 9.8, implying high debt, but a strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Importantly, Hangzhou Binjiang Real Estate GroupLtd's EBIT fell a jaw-dropping 40% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hangzhou Binjiang Real Estate GroupLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Hangzhou Binjiang Real Estate GroupLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

To be frank both Hangzhou Binjiang Real Estate GroupLtd's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Overall, it seems to us that Hangzhou Binjiang Real Estate GroupLtd's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Hangzhou Binjiang Real Estate GroupLtd (of which 1 is potentially serious!) you should know about.

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.