Is Glory Sun Land Group (HKG:299) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Glory Sun Land Group Limited (HKG:299) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Glory Sun Land Group

What Is Glory Sun Land Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Glory Sun Land Group had debt of HK$12.4b, up from HK$8.47b in one year. However, it does have HK$735.5m in cash offsetting this, leading to net debt of about HK$11.6b.

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$11.6b due within 12 months and liabilities of HK$7.97b due beyond that. On the other hand, it had cash of HK$735.5m and HK$659.4m worth of receivables due within a year. So it has liabilities totalling HK$18.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$1.32b 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, Glory Sun Land Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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 31%, to HK$6.8b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Glory Sun Land Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$171m. 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$735m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 Glory Sun Land 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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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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