Health Check: How Prudently Does Beijing Capital Grand (HKG:1329) 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. Importantly, Beijing Capital Grand Limited (HKG:1329) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Beijing Capital Grand

What Is Beijing Capital Grand's Net Debt?

The image below, which you can click on for greater detail, shows that Beijing Capital Grand had debt of CN¥10.0b at the end of December 2023, a reduction from CN¥11.9b over a year. On the flip side, it has CN¥1.47b in cash leading to net debt of about CN¥8.57b.

A Look At Beijing Capital Grand's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Capital Grand had liabilities of CN¥6.93b due within 12 months and liabilities of CN¥6.61b due beyond that. On the other hand, it had cash of CN¥1.47b and CN¥361.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.7b.

The deficiency here weighs heavily on the CN¥1.28b 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 definitely think shareholders need to watch this one closely. At the end of the day, Beijing Capital Grand 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 you can't view debt in total isolation; since Beijing Capital Grand will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Capital Grand wasn't profitable at an EBIT level, but managed to grow its revenue by 127%, to CN¥2.1b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Beijing Capital Grand's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥67m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 CN¥321m in the last year. So we think buying this stock is risky. 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 instance, we've identified 3 warning signs for Beijing Capital Grand (2 are concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com