Backed by Berkshire Hathaway’s Charlie Munger, outside fund manager Li Lu makes no bones about it when he says, “The biggest investment risk isn’t price volatility, it’s whether you will suffer a permanent loss of capital.” So it seems that smart money knows that debt — which usually plays a role in bankruptcies — is a very important factor when assessing a company’s risk. We can see that Sino Land Company Limited (HKG:83) uses debt in his business. But should shareholders be concerned about the use of debt?
When is debt a problem?
Debt typically only becomes a real problem when a company cannot easily repay it, whether by raising capital or using its own cash flow. If things get really bad, lenders can take control of the deal. However, a more common (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to get the debt under control. However, the most common situation is that a company is managing its debt reasonably well — and for its own benefit. When thinking about a company’s use of debt, let’s first consider cash and debt together.
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How much debt does Sino Land have?
As you can see below, Sino Land had debts of HK$6.06 billion as of June 2022, compared to HK$7.90 a year earlier. But it also has HK$44.8 billion in cash to offset this, meaning it has HK$38.7 billion in net cash.
How strong is Sino Land’s balance sheet?
According to the latest reported balance sheet, Sino Land had HK$15.1 billion in debt maturing within 12 months and HK$5.65 billion in debt maturing after 12 months. On the other hand, it had HK$44.8 billion in cash and HK$6.24 billion in receivables maturing within one year. So it actually has HK$30.3 billion more cash and cash equivalents than total liabilities.
This ample liquidity implies that Sino Land’s balance sheet is as resilient as a giant sequoia. Given that fact, we think his record is strong as an ox. Simply put, the fact that Sino Land has more cash than debt arguably is a good indication that it can safely manage its debt.
Good thing Sino Land’s burden isn’t too heavy as its EBIT fell 42% last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turning sour. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will determine whether Sino Land can strengthen its balance sheet over time. So if you focus on the future, you can check this free Analyst earnings forecast report.
After all, a company can only pay off debts with hard cash, not with accounting profits. Although Sino Land has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow to understand how quickly it’s building (or eroding) that cash. . Balance. Over the past three years, Sino Land has reported free cash flow equivalent to 64% of its EBIT, which is about normal since free cash flow excludes interest and taxes. This cold, hard money means they can reduce their debt whenever they want.
While it’s always useful to examine a company’s debt, in this case Sino Land has HK$38.7 billion in net cash and a decent-looking balance sheet. So we don’t think Sino Land’s use of debt is risky. When analyzing debt, the balance sheet is the obvious place to start. But ultimately, any business can have off-balance-sheet risks. These risks can be difficult to detect. Every company has them and we discovered them 1 warning sign for Sino Land you should know.
Of course, if you’re one of those investors who prefer to buy stocks without the burden of debt, don’t hesitate to explore our exclusive list of net cash growth stocks today.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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