Health Check: How Prudently Does Glory Sun Land Group (HKG:299) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Glory Sun Land Group Limited (HKG:299) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Glory Sun Land Group

How Much Debt Does Glory Sun Land Group Carry?

As you can see below, at the end of June 2021, Glory Sun Land Group had HK$12.3b of debt, up from HK$9.97b a year ago. Click the image for more detail. On the flip side, it has HK$870.4m in cash leading to net debt of about HK$11.4b.

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

Zooming in on the latest balance sheet data, we can see that Glory Sun Land Group had liabilities of HK$14.2b due within 12 months and liabilities of HK$7.49b due beyond that. Offsetting these obligations, it had cash of HK$870.4m as well as receivables valued at HK$692.8m due within 12 months. So its liabilities total HK$20.2b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$879.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 25%, to HK$7.7b. That makes us nervous, to say the least.

Caveat Emptor

While Glory Sun Land 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 HK$191m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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 burned through HK$305m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. Be aware that Glory Sun Land Group is showing 2 warning signs in our investment analysis , you should know about...

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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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.