These 4 metrics indicate that Guodian Technology & Environment Group (HKG: 1296) is using debt risky
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Guodian Technology & Environment Group Corporation Limited (HKG: 1296) uses debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Guodian Technology & Environment Group
What is the debt of the Guodian Technology & Environment group?
The image below, which you can click for more details, shows that Guodian Technology & Environment Group had a debt of CN Â¥ 11.7b at the end of June 2021, a reduction from CN Â¥ 13.3b on a year. However, he also had CN 6.65 billion in cash, so his net debt was CN 5.08 billion.
A look at the responsibilities of the Guodian Technology & Environment group
The latest balance sheet data shows that Guodian Technology & Environment Group had debts of CN 19.8 billion due within one year, and debts of CN 7.13 billion due thereafter. In compensation for these obligations, it had cash of NC 6.65 billion as well as receivables valued at NC 10.4 billion due within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 9.87 bn.
This deficit casts a shadow over the CN Â¥ 3.56b company, like a colossus towering over mere mortals. We therefore believe that shareholders should watch it closely. After all, Guodian Technology & Environment Group would likely need a major recapitalization if it were to pay its creditors today.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). 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).
The low interest coverage of 0.82 times and an extremely high Net Debt / EBITDA ratio of 7.4 affected our confidence in Guodian Technology & Environment Group like a punch in the stomach. The debt burden here is considerable. However, the silver lining was that Guodian Technology & Environment Group achieved a positive EBIT of CN Â¥ 308m in the past twelve months, an improvement over the loss of the previous year. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since Guodian Technology & Environment Group will need profits to repay this debt. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. In the past year, Guodian Technology & Environment Group reported free cash flow of 17% of its EBIT, which is really pretty low. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
At first glance, Guodian Technology & Environment Group’s hedging of interests left us hesitant about the stock, and its total liability level was no more appealing than the lone empty restaurant on the busiest night of the year. That said, his ability to increase his EBIT is not that much of a concern. Considering all of the above factors, it seems that Guodian Technology & Environment Group is too much in debt. While some investors like this kind of risky game, it is certainly not our cup of tea. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Guodian Technology & Environment Group (2 are significant) you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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 documents. Simply Wall St has no position in the mentioned stocks.
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