Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Langold Real Estate Co., Ltd. (SZSE:002305) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Langold Real Estate

What Is Langold Real Estate's Net Debt?

The chart below, which you can click on for greater detail, shows that Langold Real Estate had CN¥7.09b in debt in March 2022; about the same as the year before. However, it also had CN¥2.26b in cash, and so its net debt is CN¥4.83b.

A Look At Langold Real Estate's Liabilities

We can see from the most recent balance sheet that Langold Real Estate had liabilities of CN¥22.0b falling due within a year, and liabilities of CN¥7.37b due beyond that. Offsetting these obligations, it had cash of CN¥2.26b as well as receivables valued at CN¥2.68b due within 12 months. So its liabilities total CN¥24.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥5.41b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Langold Real Estate 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 Langold Real Estate will need earnings to service that debt. 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.

Over 12 months, Langold Real Estate made a loss at the EBIT level, and saw its revenue drop to CN¥3.6b, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Langold Real Estate's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥754m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥1.0b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Langold Real Estate (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.