Is LVGEM (China) Real Estate Investment (HKG:95) Using Debt In A Risky Way?

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.' 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. We can see that LVGEM (China) Real Estate Investment Company Limited (HKG:95) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is LVGEM (China) Real Estate Investment's Net Debt?

As you can see below, LVGEM (China) Real Estate Investment had CN¥32.2b of debt at June 2025, down from CN¥35.7b a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is LVGEM (China) Real Estate Investment's Balance Sheet?

The latest balance sheet data shows that LVGEM (China) Real Estate Investment had liabilities of CN¥60.6b due within a year, and liabilities of CN¥20.4b falling due after that. Offsetting these obligations, it had cash of CN¥342.5m as well as receivables valued at CN¥401.2m due within 12 months. So its liabilities total CN¥80.3b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥1.56b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, LVGEM (China) Real Estate Investment 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 you can't view debt in total isolation; since LVGEM (China) Real Estate Investment will need earnings to service that debt. 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.

See our latest analysis for LVGEM (China) Real Estate Investment

In the last year LVGEM (China) Real Estate Investment had a loss before interest and tax, and actually shrunk its revenue by 58%, to CN¥2.8b. That makes us nervous, to say the least.

Caveat Emptor

While LVGEM (China) Real Estate Investment's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥500m at the EBIT level. 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 CN¥5.5b in the last year. So we think buying this stock is risky. 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 LVGEM (China) Real Estate Investment (of which 2 make us uncomfortable!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.