Does Beijing Capital Grand (HKG:1329) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Beijing Capital Grand Limited (HKG:1329) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Capital Grand

What Is Beijing Capital Grand's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Beijing Capital Grand had CN¥9.77b of debt, an increase on CN¥9.23b, over one year. However, it does have CN¥840.4m in cash offsetting this, leading to net debt of about CN¥8.93b.

How Strong Is Beijing Capital Grand's Balance Sheet?

We can see from the most recent balance sheet that Beijing Capital Grand had liabilities of CN¥7.30b falling due within a year, and liabilities of CN¥6.02b due beyond that. Offsetting this, it had CN¥840.4m in cash and CN¥273.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥12.2b.

This deficit casts a shadow over the CN¥2.31b 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, Beijing Capital Grand would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing Capital Grand 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.

In the last year Beijing Capital Grand had a loss before interest and tax, and actually shrunk its revenue by 45%, to CN¥1.0b. To be frank that doesn't bode well.

Caveat Emptor

While Beijing Capital Grand's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥92m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥285m 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. Case in point: We've spotted 2 warning signs for Beijing Capital Grand you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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