David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Powerlong Real Estate Holdings Limited (HKG:1238) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Powerlong Real Estate Holdings Carry?

As you can see below, Powerlong Real Estate Holdings had CN¥58.4b of debt at June 2024, down from CN¥60.9b a year prior. However, because it has a cash reserve of CN¥6.54b, its net debt is less, at about CN¥51.9b.

How Healthy Is Powerlong Real Estate Holdings' Balance Sheet?

We can see from the most recent balance sheet that Powerlong Real Estate Holdings had liabilities of CN¥114.6b falling due within a year, and liabilities of CN¥39.1b due beyond that. Offsetting these obligations, it had cash of CN¥6.54b as well as receivables valued at CN¥14.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥132.4b.

This deficit casts a shadow over the CN¥1.71b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Powerlong Real Estate Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Powerlong Real Estate Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Powerlong Real Estate Holdings's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Powerlong Real Estate Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥1.3b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 lost CN¥5.4b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. For instance, we've identified 3 warning signs for Powerlong Real Estate Holdings that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.