Is SanDi PropertiesLtd (TWSE:1438) 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. As with many other companies SanDi Properties Co.,Ltd. (TWSE:1438) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SanDi PropertiesLtd

What Is SanDi PropertiesLtd's Debt?

As you can see below, at the end of June 2024, SanDi PropertiesLtd had NT$7.12b of debt, up from NT$5.67b a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is SanDi PropertiesLtd's Balance Sheet?

We can see from the most recent balance sheet that SanDi PropertiesLtd had liabilities of NT$5.41b falling due within a year, and liabilities of NT$4.48b due beyond that. Offsetting these obligations, it had cash of NT$19.5m as well as receivables valued at NT$196.8m due within 12 months. So it has liabilities totalling NT$9.67b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's NT$6.85b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is SanDi PropertiesLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SanDi PropertiesLtd had a loss before interest and tax, and actually shrunk its revenue by 89%, to NT$46m. To be frank that doesn't bode well.

Caveat Emptor

While SanDi PropertiesLtd'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 NT$17m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through NT$423m in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SanDi PropertiesLtd (of which 1 is potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.