Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, China Fortune Land Development Co., Ltd. (SHSE:600340) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for China Fortune Land Development
What Is China Fortune Land Development's Debt?
You can click the graphic below for the historical numbers, but it shows that China Fortune Land Development had CN¥190.2b of debt in September 2023, down from CN¥206.8b, one year before. However, it does have CN¥5.61b in cash offsetting this, leading to net debt of about CN¥184.6b.
How Healthy Is China Fortune Land Development's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China Fortune Land Development had liabilities of CN¥171.2b due within 12 months and liabilities of CN¥178.1b due beyond that. On the other hand, it had cash of CN¥5.61b and CN¥208.7b worth of receivables due within a year. So its liabilities total CN¥134.9b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN¥6.15b 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. At the end of the day, China Fortune Land Development would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Fortune Land Development 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, China Fortune Land Development made a loss at the EBIT level, and saw its revenue drop to CN¥28b, which is a fall of 24%. That makes us nervous, to say the least.
Caveat Emptor
While China Fortune Land Development's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥4.7b 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 burned through CN¥3.0b in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. Case in point: We've spotted 3 warning signs for China Fortune Land Development you should be aware of, and 2 of them are significant.
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.