Health Check: How Prudently Does Guangdong Land Holdings (HKG:124) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Guangdong Land Holdings Limited (HKG:124) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guangdong Land Holdings

What Is Guangdong Land Holdings's Debt?

As you can see below, Guangdong Land Holdings had HK$22.6b of debt at June 2024, down from HK$27.4b a year prior. On the flip side, it has HK$4.26b in cash leading to net debt of about HK$18.4b.

How Healthy Is Guangdong Land Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Land Holdings had liabilities of HK$26.7b due within 12 months and liabilities of HK$14.0b due beyond that. Offsetting this, it had HK$4.26b in cash and HK$798.4m in receivables that were due within 12 months. So it has liabilities totalling HK$35.7b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$607.6m 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. At the end of the day, Guangdong Land Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangdong Land Holdings'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 Guangdong Land Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 207%, to HK$5.7b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though Guangdong Land Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping HK$2.5b. 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$2.5b in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Guangdong Land Holdings has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.