Desun Real Estate Investment Services Group (HKG:2270) Takes On Some Risk With Its Use Of Debt

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 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 can see that Desun Real Estate Investment Services Group Co., Ltd. (HKG:2270) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Desun Real Estate Investment Services Group Carry?

As you can see below, at the end of June 2025, Desun Real Estate Investment Services Group had CN¥119.8m of debt, up from CN¥9.75m a year ago. Click the image for more detail. But on the other hand it also has CN¥233.0m in cash, leading to a CN¥113.2m net cash position.

How Healthy Is Desun Real Estate Investment Services Group's Balance Sheet?

According to the last reported balance sheet, Desun Real Estate Investment Services Group had liabilities of CN¥352.4m due within 12 months, and liabilities of CN¥256.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥233.0m as well as receivables valued at CN¥234.9m due within 12 months. So its liabilities total CN¥140.8m more than the combination of its cash and short-term receivables.

Of course, Desun Real Estate Investment Services Group has a market capitalization of CN¥1.88b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Desun Real Estate Investment Services Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Desun Real Estate Investment Services Group

Shareholders should be aware that Desun Real Estate Investment Services Group's EBIT was down 39% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is Desun Real Estate Investment Services 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Desun Real Estate Investment Services Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Desun Real Estate Investment Services Group created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Desun Real Estate Investment Services Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥113.2m. So while Desun Real Estate Investment Services Group does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 2 warning signs for Desun Real Estate Investment Services Group (1 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.