Does Beijing Properties (Holdings) (HKG:925) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Beijing Properties (Holdings) Limited (HKG:925) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Beijing Properties (Holdings)

What Is Beijing Properties (Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Beijing Properties (Holdings) had CN¥8.97b of debt, an increase on CN¥7.92b, over one year. However, because it has a cash reserve of CN¥1.96b, its net debt is less, at about CN¥7.01b.

How Healthy Is Beijing Properties (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Properties (Holdings) had liabilities of CN¥2.80b due within 12 months and liabilities of CN¥9.08b due beyond that. Offsetting these obligations, it had cash of CN¥1.96b as well as receivables valued at CN¥105.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.81b.

This deficit casts a shadow over the CN¥219.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Beijing Properties (Holdings) 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 you can't view debt in total isolation; since Beijing Properties (Holdings) 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.

Over 12 months, Beijing Properties (Holdings) made a loss at the EBIT level, and saw its revenue drop to CN¥903m, which is a fall of 43%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Beijing Properties (Holdings)'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 CN¥236m. 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 burned through CN¥31m in the last year. So is this a high risk stock? We think so, and we'd avoid it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Beijing Properties (Holdings) (of which 2 are significant!) 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.