Beijing Capital Land (HKG: 2868) has no shortage of debt

David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that Beijing Capital Land Ltd. (HKG: 2868) has debts on its balance sheet. But does this debt worry shareholders?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest analysis for Beijing Capital Land

How Much Is Beijing Capital Land Debt?

As you can see below, Beijing Capital Land had 102.5 billion yen in debt in March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he also had 40.2 billion yen in cash, so his net debt was 62.3 billion yen.

SEHK: 2868 Debt / Equity History May 24, 2021

How strong is Beijing Capital Land’s balance sheet?

The latest balance sheet data shows Beijing Capital Land had commitments of 93.4 billion yen due one year and commitments of 74.1 billion yen thereafter. In return for these obligations, he had cash of 40.2 billion yen as well as receivables valued at 25.5 billion yen, due within 12 months. Thus, its liabilities outweigh the sum of its cash and its (short-term) receivables of 101.7 billion yen.

The deficiency weighs heavily on the 3.65 billion yen company here, as if a child struggles under the weight of a huge backpack full of books, his sports equipment and a trumpet. We therefore clearly believe that shareholders should monitor this closely. After all, Beijing Capital Land would likely need a major recapitalization if it were to pay its creditors today.

We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.

With a net debt to EBITDA ratio of 22.4, it’s fair to say that Beijing Capital Land has significant debt. But the good news is that he enjoys quite a comforting 2.9 times interest coverage, which suggests he can meet his obligations responsibly. Another concern for investors could be that Beijing Capital Land’s EBIT fell 16% last year. If things continue like this, managing the debt will be about as easy as putting an angry house cat in its travel box. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at the debt in total isolation; since Beijing Capital Land will need revenue to service this debt. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.

But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. In the past three years, Beijing Capital Land has burned a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, Beijing Capital Land’s conversion of EBIT to free cash flow left us hesitant about the stock, and its total liability level was no more appealing than the only restaurant that was empty on the busiest night. responsible for the year. And even its EBIT growth rate doesn’t inspire much confidence. It seems to us that Beijing Capital Land carries a heavy balance sheet burden. If you play with fire you might get burned, so we would probably give this stock a lot. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for Beijing Capital Land (2 don’t sit too well with us) you have to be aware of it.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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Alan Adams

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