Stock Analysis

Is Sino Land (HKG:83) Using Too Much Debt?

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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sino Land Company Limited (HKG:83) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sino Land

What Is Sino Land's Net Debt?

As you can see below, Sino Land had HK$5.87b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$44.4b in cash, leading to a HK$38.6b net cash position.

SEHK:83 Debt to Equity History March 18th 2023

A Look At Sino Land's Liabilities

We can see from the most recent balance sheet that Sino Land had liabilities of HK$13.8b falling due within a year, and liabilities of HK$5.47b due beyond that. Offsetting these obligations, it had cash of HK$44.4b as well as receivables valued at HK$6.53b due within 12 months. So it actually has HK$31.7b more liquid assets than total liabilities.

This luscious liquidity implies that Sino Land's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sino Land has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Sino Land's saving grace is its low debt levels, because its EBIT has tanked 72% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sino Land can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sino Land has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Sino Land recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sino Land has HK$38.6b in net cash and a decent-looking balance sheet. So we don't have any problem with Sino Land's use of debt. 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. We've identified 2 warning signs with Sino Land (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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