Is China Greenland Broad Greenstate Group (HKG:1253) Using Too Much Debt?

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 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, China Greenland Broad Greenstate Group Company Limited (HKG:1253) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 China Greenland Broad Greenstate Group

What Is China Greenland Broad Greenstate Group's Net Debt?

The chart below, which you can click on for greater detail, shows that China Greenland Broad Greenstate Group had CN¥803.8m in debt in June 2023; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is China Greenland Broad Greenstate Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Greenland Broad Greenstate Group had liabilities of CN¥1.99b due within 12 months and liabilities of CN¥365.2m due beyond that. Offsetting this, it had CN¥5.99m in cash and CN¥1.14b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.21b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥312.3m 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, China Greenland Broad Greenstate Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is China Greenland Broad Greenstate 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, China Greenland Broad Greenstate Group made a loss at the EBIT level, and saw its revenue drop to CN¥19m, which is a fall of 89%. That makes us nervous, to say the least.

Caveat Emptor

While China Greenland Broad Greenstate Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥426m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CN¥9.7m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for China Greenland Broad Greenstate Group (of which 3 are 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.