Modern lands (China) (HKG: 1107) are not short of debt
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that Modern Earth (China) Co., Limited (HKG: 1107) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Modern Land (China)
What is modern land debt (China)?
As you can see below, at the end of June 2021, Modern Land (China) had a debt of CNN 28.8 billion, up from CNN 21.6 billion a year ago. Click on the image for more details. On the other hand, he has CNN 13.6 billion in cash, resulting in net debt of around CNN 15.1 billion.
How strong is Modern Land (China) ‘s balance sheet?
According to the last published balance sheet, Modern Land (China) had a liability of 66.2 billion yuan due within 12 months and a liability of 20.1 billion CN beyond 12 months. In compensation for these obligations, he had cash of CN 13.6 billion as well as receivables valued at CN 9.18 billion due within 12 months. It therefore has liabilities totaling CNN 63.5 billion more than its cash and short-term receivables combined.
The deficiency here weighs heavily on the CN Â¥ 1.08b company itself, as if a child struggles under the weight of a huge backpack full of books, his sports equipment, and a trumpet. So we would be watching its record closely, without a doubt. In the end, Modern Land (China) would probably need a major recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about the levels of debt compared to earnings. 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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
With a net debt to EBITDA ratio of 5.9, it’s fair to say that Modern Land (China) has significant debt. However, its interest coverage of 6.5 is reasonably strong, which is a good sign. Unfortunately, Modern Land (China) EBIT has fallen 15% over the past four quarters. If incomes continue to drop at this rate, it will be more difficult to manage debt than taking three kids under 5 to a fancy pants restaurant. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Modern Land (China) can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Modern Land (China) has created a free cash flow of 10% of its EBIT, a performance without interest. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.
Our point of view
At first glance, Modern Land (China) net debt to EBITDA left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night. responsible for the year. But at least it’s decent enough to cover its interest costs with its EBIT; it’s encouraging. Considering all of the above factors, it seems Modern Land (China) has too much debt. While some investors like this kind of risky game, it is certainly not our cup of tea. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Modern Land (China) (of which 1 is significant!) that you should know.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.