Is Beijing Capital Grand (HKG:1329) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Beijing Capital Grand Limited (HKG:1329) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing Capital Grand

How Much Debt Does Beijing Capital Grand Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Beijing Capital Grand had CN¥10.1b of debt, an increase on CN¥8.46b, over one year. However, it does have CN¥1.66b in cash offsetting this, leading to net debt of about CN¥8.42b.

A Look At Beijing Capital Grand's Liabilities

We can see from the most recent balance sheet that Beijing Capital Grand had liabilities of CN¥4.10b falling due within a year, and liabilities of CN¥9.07b due beyond that. Offsetting these obligations, it had cash of CN¥1.66b as well as receivables valued at CN¥288.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.2b.

This deficit casts a shadow over the CN¥1.97b 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Beijing Capital Grand made a loss at the EBIT level, and saw its revenue drop to CN¥993m, which is a fall of 53%. That makes us nervous, to say the least.

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¥127m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. 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¥417m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Beijing Capital Grand is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

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. 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.
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