Is China Yuanbang Property Holdings (SGX:BCD) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that China Yuanbang Property Holdings Limited (SGX:BCD) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Yuanbang Property Holdings

What Is China Yuanbang Property Holdings's Debt?

As you can see below, China Yuanbang Property Holdings had CN¥700.9m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥33.1m in cash leading to net debt of about CN¥667.7m.

A Look At China Yuanbang Property Holdings' Liabilities

The latest balance sheet data shows that China Yuanbang Property Holdings had liabilities of CN¥1.66b due within a year, and liabilities of CN¥436.5m falling due after that. Offsetting these obligations, it had cash of CN¥33.1m as well as receivables valued at CN¥103.2m due within 12 months. So its liabilities total CN¥1.96b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥58.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Yuanbang Property Holdings 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 China Yuanbang Property Holdings 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, China Yuanbang Property Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥79m, which is a fall of 84%. That makes us nervous, to say the least.

Caveat Emptor

While China Yuanbang Property Holdings'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 a very considerable CN¥64m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥21m in the last year. So is this a high risk stock? We think so, and we'd avoid it. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for China Yuanbang Property Holdings that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.