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.' 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. Importantly, Macau Legend Development Limited (HKG:1680) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Macau Legend Development
What Is Macau Legend Development's Debt?
As you can see below, Macau Legend Development had HK$2.57b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$81.0m in cash leading to net debt of about HK$2.49b.
A Look At Macau Legend Development's Liabilities
The latest balance sheet data shows that Macau Legend Development had liabilities of HK$1.01b due within a year, and liabilities of HK$2.15b falling due after that. On the other hand, it had cash of HK$81.0m and HK$106.5m worth of receivables due within a year. So its liabilities total HK$2.97b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the HK$1.10b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Macau Legend Development would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Macau Legend Development's earnings that will influence how the balance sheet holds up in the future. 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 Macau Legend Development wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to HK$902m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Even though Macau Legend Development managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable HK$205m at the EBIT level. 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. Nevertheless, we would not bet on it given that it lost HK$4.9m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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 1 warning sign for Macau Legend Development that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com