Is Landing International Development (HKG:582) Using Debt Sensibly?

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.' 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. We can see that Landing International Development Limited (HKG:582) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

View our latest analysis for Landing International Development

What Is Landing International Development's Net Debt?

As you can see below, Landing International Development had HK$2.54b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$647.4m in cash, and so its net debt is HK$1.89b.

A Look At Landing International Development's Liabilities

According to the last reported balance sheet, Landing International Development had liabilities of HK$1.32b due within 12 months, and liabilities of HK$1.78b due beyond 12 months. Offsetting these obligations, it had cash of HK$647.4m as well as receivables valued at HK$6.14m due within 12 months. So it has liabilities totalling HK$2.45b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$1.14b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Landing International Development would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Landing International 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.

In the last year Landing International Development had a loss before interest and tax, and actually shrunk its revenue by 3.3%, to HK$788m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Landing International Development produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$1.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of HK$2.1b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Landing International Development (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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