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.' 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. As with many other companies Yunnan Metropolitan RealEstate Development Co.Ltd (SHSE:600239) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Yunnan Metropolitan RealEstate DevelopmentLtd
What Is Yunnan Metropolitan RealEstate DevelopmentLtd's Debt?
The image below, which you can click on for greater detail, shows that Yunnan Metropolitan RealEstate DevelopmentLtd had debt of CN¥3.43b at the end of September 2023, a reduction from CN¥10.0b over a year. However, it does have CN¥570.8m in cash offsetting this, leading to net debt of about CN¥2.85b.
How Healthy Is Yunnan Metropolitan RealEstate DevelopmentLtd's Balance Sheet?
The latest balance sheet data shows that Yunnan Metropolitan RealEstate DevelopmentLtd had liabilities of CN¥4.60b due within a year, and liabilities of CN¥5.53b falling due after that. Offsetting these obligations, it had cash of CN¥570.8m as well as receivables valued at CN¥898.9m due within 12 months. So its liabilities total CN¥8.66b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥4.54b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Yunnan Metropolitan RealEstate DevelopmentLtd 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 it is Yunnan Metropolitan RealEstate DevelopmentLtd'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 Yunnan Metropolitan RealEstate DevelopmentLtd had a loss before interest and tax, and actually shrunk its revenue by 63%, to CN¥1.8b. That makes us nervous, to say the least.
Caveat Emptor
Not only did Yunnan Metropolitan RealEstate DevelopmentLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥308m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥215m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Yunnan Metropolitan RealEstate DevelopmentLtd has 2 warning signs we think you should be aware of.
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.
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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.