Is China New City Commercial Development (HKG:1321) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, China New City Commercial Development Limited (HKG:1321) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 China New City Commercial Development

What Is China New City Commercial Development's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 China New City Commercial Development had debt of CN¥6.36b, up from CN¥5.51b in one year. On the flip side, it has CN¥927.5m in cash leading to net debt of about CN¥5.44b.

How Strong Is China New City Commercial Development's Balance Sheet?

We can see from the most recent balance sheet that China New City Commercial Development had liabilities of CN¥3.57b falling due within a year, and liabilities of CN¥6.06b due beyond that. On the other hand, it had cash of CN¥927.5m and CN¥1.64b worth of receivables due within a year. So it has liabilities totalling CN¥7.06b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥1.71b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China New City Commercial Development 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 China New City Commercial Development 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.

Over 12 months, China New City Commercial Development made a loss at the EBIT level, and saw its revenue drop to CN¥942m, which is a fall of 41%. That makes us nervous, to say the least.

Caveat Emptor

While China New City Commercial Development'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 CN¥155m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥386m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For instance, we've identified 2 warning signs for China New City Commercial Development that you should be aware of.

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.