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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Langold Real Estate Co., Ltd. (SZSE:002305) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, 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.
Check out our latest analysis for Langold Real Estate
What Is Langold Real Estate's Net Debt?
The image below, which you can click on for greater detail, shows that Langold Real Estate had debt of CN¥5.99b at the end of March 2023, a reduction from CN¥7.09b over a year. On the flip side, it has CN¥2.20b in cash leading to net debt of about CN¥3.79b.
How Healthy Is Langold Real Estate's Balance Sheet?
We can see from the most recent balance sheet that Langold Real Estate had liabilities of CN¥19.4b falling due within a year, and liabilities of CN¥5.55b due beyond that. Offsetting these obligations, it had cash of CN¥2.20b as well as receivables valued at CN¥3.20b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥19.5b.
The deficiency here weighs heavily on the CN¥4.06b 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. After all, Langold Real Estate 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 Langold Real Estate'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.
Over 12 months, Langold Real Estate reported revenue of CN¥9.5b, which is a gain of 168%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
Caveat Emptor
Even though Langold Real Estate managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥43m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. 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 vaporized CN¥352m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Be aware that Langold Real Estate is showing 1 warning sign in our investment analysis , you should know about...
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.