Is Lippo China Resources (HKG:156) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Lippo China Resources Limited (HKG:156) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Lippo China Resources

What Is Lippo China Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Lippo China Resources had debt of HK$1.14b, up from HK$840.9m in one year. But it also has HK$1.61b in cash to offset that, meaning it has HK$469.0m net cash.

How Strong Is Lippo China Resources's Balance Sheet?

According to the last reported balance sheet, Lippo China Resources had liabilities of HK$810.6m due within 12 months, and liabilities of HK$849.4m due beyond 12 months. Offsetting these obligations, it had cash of HK$1.61b as well as receivables valued at HK$168.0m due within 12 months. So it can boast HK$114.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Lippo China Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lippo China Resources boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Lippo China Resources will need earnings to service that debt. 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, Lippo China Resources made a loss at the EBIT level, and saw its revenue drop to HK$687m, which is a fall of 60%. To be frank that doesn't bode well.

So How Risky Is Lippo China Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Lippo China Resources had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$257m of cash and made a loss of HK$290m. Given it only has net cash of HK$469.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Lippo China Resources is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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