Macau Legend Development (HKG:1680) Is Carrying A Fair Bit Of Debt

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.' 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 can see that Macau Legend Development Limited (HKG:1680) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Macau Legend Development

How Much Debt Does Macau Legend Development Carry?

As you can see below, Macau Legend Development had HK$1.97b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$165.3m in cash, and so its net debt is HK$1.80b.

How Healthy Is Macau Legend Development's Balance Sheet?

The latest balance sheet data shows that Macau Legend Development had liabilities of HK$1.15b due within a year, and liabilities of HK$2.02b falling due after that. Offsetting these obligations, it had cash of HK$165.3m as well as receivables valued at HK$217.4m due within 12 months. So its liabilities total HK$2.79b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Macau Legend Development has a market capitalization of HK$7.01b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Macau Legend Development'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.

In the last year Macau Legend Development had a loss before interest and tax, and actually shrunk its revenue by 70%, to HK$701m. That makes us nervous, to say the least.

Caveat Emptor

While Macau Legend Development'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 HK$934m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$2.0b into a profit. So we do think this stock is quite risky. 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. Case in point: We've spotted 1 warning sign for Macau Legend Development you should be aware of.

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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