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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Langold Real Estate Co., Ltd. (SZSE:002305) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 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.
Check out our latest analysis for Langold Real Estate
How Much Debt Does Langold Real Estate Carry?
The image below, which you can click on for greater detail, shows that Langold Real Estate had debt of CN¥4.28b at the end of June 2023, a reduction from CN¥6.15b over a year. However, it also had CN¥2.16b in cash, and so its net debt is CN¥2.12b.
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¥21.1b falling due within a year, and liabilities of CN¥4.79b due beyond that. Offsetting this, it had CN¥2.16b in cash and CN¥3.25b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥20.4b.
This deficit casts a shadow over the CN¥4.25b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Langold Real Estate 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 it is Langold Real Estate'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 Langold Real Estate wasn't profitable at an EBIT level, but managed to grow its revenue by 123%, to CN¥8.7b. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
While we can certainly appreciate Langold Real Estate's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥252m. 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. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥387m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Langold Real Estate (including 1 which shouldn't be ignored) .
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.