Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Gree Real Estate Co.,Ltd (SHSE:600185) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Gree Real EstateLtd
What Is Gree Real EstateLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that Gree Real EstateLtd had CN¥13.2b of debt in September 2023, down from CN¥17.8b, one year before. On the flip side, it has CN¥1.90b in cash leading to net debt of about CN¥11.3b.
A Look At Gree Real EstateLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Gree Real EstateLtd had liabilities of CN¥15.4b due within 12 months and liabilities of CN¥7.27b due beyond that. On the other hand, it had cash of CN¥1.90b and CN¥298.1m worth of receivables due within a year. So its liabilities total CN¥20.4b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥12.4b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Gree Real EstateLtd 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 Gree Real EstateLtd'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 Gree Real EstateLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 7.8%, to CN¥4.0b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Gree Real EstateLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥1.6b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥3.2b. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Gree Real EstateLtd (of which 1 can't be ignored!) you should know about.
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.