Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Horizon Construction Development Limited (HKG:9930) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Horizon Construction Development Carry?
As you can see below, Horizon Construction Development had CN¥17.3b of debt at December 2023, down from CN¥21.2b a year prior. However, it also had CN¥3.86b in cash, and so its net debt is CN¥13.5b.
How Strong Is Horizon Construction Development's Balance Sheet?
The latest balance sheet data shows that Horizon Construction Development had liabilities of CN¥9.28b due within a year, and liabilities of CN¥11.2b falling due after that. Offsetting this, it had CN¥3.86b in cash and CN¥6.55b in receivables that were due within 12 months. So its liabilities total CN¥10.0b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN¥6.05b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Horizon Construction Development would probably need a major re-capitalization if its creditors were to demand repayment.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While Horizon Construction Development's debt to EBITDA ratio (3.1) suggests that it uses some debt, its interest cover is very weak, at 2.4, suggesting high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. The good news is that Horizon Construction Development improved its EBIT by 8.4% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Horizon Construction Development can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Horizon Construction Development burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Our View
On the face of it, Horizon Construction Development's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Taking into account all the aforementioned factors, it looks like Horizon Construction Development has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. For instance, we've identified 2 warning signs for Horizon Construction Development that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
ウォーレン・バフェットは有名に言いました、「変動性はリスクとは無縁の概念」と。従って、ある株のリスクを考えるときには、その会社が抱える負債も考慮する必要があります。負債が多すぎると、会社を沈める可能性があるからです。HK 9930で多くの他の企業と同じように、Horizon Construction Development Limitedは負債を利用しています。しかし、この負債は株主にとって懸念すべき点でしょうか?
下記をご覧いただけますと、Horizon Construction Developmentは2023年12月時点で173億元の負債を抱えており、1年前の212億元から減少しています。ただし、現金386億元を所持しているため、純負債は135億元です。
Horizon Construction Developmentの財務状況はどの程度強いのか?
最新の財務諸表データによると、Horizon Construction Developmentは次の1年以内に928億元、その後の数年で1,120億元の債務を負っています。これに対して、現金386億元と1年以内に回収することのできる6.55億元の債権を保有しています。つまり、負債は現金と短期債権の組み合わせよりも10.0億元多くあります。
この欠陥は、子供が本、運動用具、トランペットを詰め込んだ背負子に苦しみながら歩くようなもので、これはCN¥6.05bの会社にとって非常に重くのしかかっています。そのため、私たちは絶対にこの点について注視する必要があると考えます。最終的に、Horizon Construction Developmentが債権者に返済を要求された場合、大量の再資本調達を必要とする可能性があります。
Horizon Construction Developmentの負債からEBITDA比率(3.1)は、一部の負債を持っていることを示していますが、非常に弱い利益上限(2.4)は、高レバレッジを示唆しています。これは、同社の著しい減価償却費や償却費の一部によるものであり、そのためEBITDAは非常に甘い収益の測定方法となる可能性があり、最初に見るよりも債務は重荷となっている可能性があります。借り入れ金のコストが株主の収益に悪影響を与えていることは明らかであり、その上、Horizon Construction Developmentは、過去12か月間にEBITを8.4%改善し、収益に対する負債を徐々に減らしていることが分かります。借り入れを分析する際には、財務諸表を重視する必要があります。しかし、最終的にビジネスの将来的な収益性がHorizon Construction Developmentが時間をかけて財務諸表を強化できるかどうかを決定することになります。ですから、職業投資家やアナリストの利潤予測に関する無料のレポートが気になる方は、このリンクをクリックしてください。
最後に、企業は会計利益ではなく現金で負債を返済することができます。したがって、Horizon Construction DevelopmentのEBITがそれに対応するフリーキャッシュフローにつながっているかどうかを調べる必要があります。過去3年間、Horizon Construction Developmentは多くの現金を燃やしました。それは成長のために支出した結果かもしれませんが、負債を拡大することによって、負債ははるかに危険になることがあります。
私たちの見解
表面上、Horizon Construction DevelopmentのEBITからフリーキャッシュフローへの変換は株式にとって慎重に考える必要があり、総負債のレベルも一年中最も混雑した夜にある一番空いているレストランと同じくらい魅力的ではありませんでした。しかし、少なくともEBITを増やすことにはかなりの強みがあるため、励みになります。上記のすべての要因を考慮すると、Horizon Construction Developmentは負債を抱えすぎているように見えます。リスキーなプレイが好きな投資家もいるかもしれませんが、私たちはそれが我々の好みではないことは確かです。負債レベルを分析する際には、まず財務諸表が明らかな場所にありますが、投資のリスクがすべて財務諸表に含まれているわけではないことにも注意してください。たとえば、Horizon Construction Developmentには警告すべき2つのリスクがあると指摘されています。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。