The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Glory Sun Land Group Limited (HKG:299) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Glory Sun Land Group
How Much Debt Does Glory Sun Land Group Carry?
As you can see below, Glory Sun Land Group had HK$3.84b of debt at June 2024, down from HK$4.81b a year prior. However, because it has a cash reserve of HK$1.43b, its net debt is less, at about HK$2.41b.
How Healthy Is Glory Sun Land Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Glory Sun Land Group had liabilities of HK$7.64b due within 12 months and liabilities of HK$653.3m due beyond that. Offsetting these obligations, it had cash of HK$1.43b as well as receivables valued at HK$380.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$6.48b.
The deficiency here weighs heavily on the HK$20.7m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Glory Sun Land Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Glory Sun Land Group 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.
In the last year Glory Sun Land Group wasn't profitable at an EBIT level, but managed to grow its revenue by 186%, to HK$1.5b. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Even though Glory Sun Land Group 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$563m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$2.0b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Glory Sun Land Group (including 2 which are potentially serious) .
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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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.