Is Coastal Greenland (HKG:1124) Using Debt In A Risky Way?

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 Coastal Greenland Limited (HKG:1124) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Coastal Greenland

What Is Coastal Greenland's Debt?

As you can see below, Coastal Greenland had HK$2.26b of debt at September 2020, down from HK$2.39b a year prior. However, it also had HK$112.2m in cash, and so its net debt is HK$2.14b.

A Look At Coastal Greenland's Liabilities

According to the last reported balance sheet, Coastal Greenland had liabilities of HK$2.87b due within 12 months, and liabilities of HK$1.63b due beyond 12 months. On the other hand, it had cash of HK$112.2m and HK$237.4m worth of receivables due within a year. So its liabilities total HK$4.14b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$294.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Coastal Greenland 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 Coastal Greenland 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, Coastal Greenland made a loss at the EBIT level, and saw its revenue drop to HK$44m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

While Coastal Greenland's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$266m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$268m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. To that end, you should learn about the 4 warning signs we've spotted with Coastal Greenland (including 1 which is is a bit concerning) .

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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