Glory Sun Land Group (HKG:299) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Glory Sun Land Group Limited (HKG:299) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Glory Sun Land Group

How Much Debt Does Glory Sun Land Group Carry?

As you can see below, Glory Sun Land Group had HK$7.22b of debt at June 2022, down from HK$12.3b a year prior. However, because it has a cash reserve of HK$190.3m, its net debt is less, at about HK$7.03b.

A Look At Glory Sun Land Group's Liabilities

We can see from the most recent balance sheet that Glory Sun Land Group had liabilities of HK$10.6b falling due within a year, and liabilities of HK$3.78b due beyond that. On the other hand, it had cash of HK$190.3m and HK$762.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$13.5b.

This deficit casts a shadow over the HK$93.9m 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, Glory Sun Land Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Glory Sun Land Group'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, Glory Sun Land Group made a loss at the EBIT level, and saw its revenue drop to HK$3.6b, which is a fall of 54%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Glory Sun Land Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$256m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But we note that trailing twelve month EBIT is worse than the free cash flow of HK$1.2b and the profit of HK$97m. So its situation may not be as precarious as the EBIT would imply. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Glory Sun Land Group (2 are concerning) you should be aware of.

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.