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. 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. We note that Greenway Mining Group Limited (HKG:2133) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
What Is Greenway Mining Group’s Debt?
As you can see below, Greenway Mining Group had CN¥366.8m of debt at June 2019, down from CN¥465.5m a year prior. On the flip side, it has CN¥9.00m in cash leading to net debt of about CN¥357.8m.
How Strong Is Greenway Mining Group’s Balance Sheet?
According to the last reported balance sheet, Greenway Mining Group had liabilities of CN¥448.2m due within 12 months, and liabilities of CN¥92.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.00m as well as receivables valued at CN¥6.45m due within 12 months. So its liabilities total CN¥525.3m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥207.3m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt After all, Greenway Mining 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 you can’t view debt in total isolation; since Greenway Mining Group 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, Greenway Mining Group made a loss at the EBIT level, and saw its revenue drop to CN¥173m, which is a fall of 14%. We would much prefer see growth.
Not only did Greenway Mining Group’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥5.6m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥16m in just last twelve months, and it doesn’t have much by way of liquid assets. So while it will probably survive, we think it’s risky; we’d treat it like chicken pox and try to avoid it. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Greenway Mining Group’s profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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