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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Glory Sun Land Group Limited (HKG:299) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Glory Sun Land Group

What Is Glory Sun Land Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Glory Sun Land Group had HK$4.67b of debt in December 2023, down from HK$6.48b, one year before. On the flip side, it has HK$1.46b in cash leading to net debt of about HK$3.21b.

How Healthy Is Glory Sun Land Group's Balance Sheet?

The latest balance sheet data shows that Glory Sun Land Group had liabilities of HK$8.14b due within a year, and liabilities of HK$783.5m falling due after that. Offsetting this, it had HK$1.46b in cash and HK$542.4m in receivables that were due within 12 months. So its liabilities total HK$6.92b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$21.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Glory Sun Land Group 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 Glory Sun Land Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Glory Sun Land Group had a loss before interest and tax, and actually shrunk its revenue by 26%, to HK$1.2b. That makes us nervous, to say the least.

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$468m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$601m in the last year. So we think buying this stock is 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. Case in point: We've spotted 2 warning signs for Glory Sun Land Group 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.