Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CASIN Real Estate Development Group Co.,Ltd. (SZSE:000838) does carry debt. But should shareholders be worried about its use of debt?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 CASIN Real Estate Development GroupLtd
How Much Debt Does CASIN Real Estate Development GroupLtd Carry?
You can click the graphic below for the historical numbers, but it shows that CASIN Real Estate Development GroupLtd had CN¥836.9m of debt in September 2023, down from CN¥1.13b, one year before. However, because it has a cash reserve of CN¥640.3m, its net debt is less, at about CN¥196.6m.
A Look At CASIN Real Estate Development GroupLtd's Liabilities
The latest balance sheet data shows that CASIN Real Estate Development GroupLtd had liabilities of CN¥4.52b due within a year, and liabilities of CN¥134.8m falling due after that. Offsetting this, it had CN¥640.3m in cash and CN¥358.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥3.66b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of CN¥4.19b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CASIN Real Estate Development GroupLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, CASIN Real Estate Development GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.7b, which is a fall of 6.9%. We would much prefer see growth.
Caveat Emptor
Importantly, CASIN Real Estate Development GroupLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥457m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥145m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with CASIN Real Estate Development GroupLtd .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.