David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Coastal Greenland Limited (HKG:1124) makes use of debt. But should shareholders be worried about its use of debt?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Coastal Greenland
How Much Debt Does Coastal Greenland Carry?
As you can see below, Coastal Greenland had HK$400.2m of debt at September 2023, down from HK$1.54b a year prior. However, because it has a cash reserve of HK$13.4m, its net debt is less, at about HK$386.9m.
How Healthy Is Coastal Greenland's Balance Sheet?
We can see from the most recent balance sheet that Coastal Greenland had liabilities of HK$3.87b falling due within a year, and liabilities of HK$50.4m due beyond that. On the other hand, it had cash of HK$13.4m and HK$749.1m worth of receivables due within a year. So it has liabilities totalling HK$3.16b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the HK$78.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Coastal Greenland 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 Coastal Greenland'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.
In the last year Coastal Greenland wasn't profitable at an EBIT level, but managed to grow its revenue by 3,603%, to HK$211m. That's virtually the hole-in-one of revenue growth!
Caveat Emptor
While we can certainly appreciate Coastal Greenland's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable HK$148m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$1.2b in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Coastal Greenland you should be aware of, and 2 of them are concerning.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.