Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Gree Real Estate Co.,Ltd (SHSE:600185) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Gree Real EstateLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Gree Real EstateLtd had CN¥12.2b of debt in September 2024, down from CN¥13.2b, one year before. However, because it has a cash reserve of CN¥886.7m, its net debt is less, at about CN¥11.3b.

How Healthy Is Gree Real EstateLtd's Balance Sheet?

According to the last reported balance sheet, Gree Real EstateLtd had liabilities of CN¥13.3b due within 12 months, and liabilities of CN¥6.00b due beyond 12 months. On the other hand, it had cash of CN¥886.7m and CN¥235.6m worth of receivables due within a year. So its liabilities total CN¥18.1b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥14.8b, we think shareholders really should watch Gree Real EstateLtd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gree Real EstateLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Gree Real EstateLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥4.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Gree Real EstateLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥274m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥1.3b. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Gree Real EstateLtd is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.