Does Gemdale Properties and Investment (HKG:535) have a healthy balance sheet?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Mostly, Gemdale Properties and Investment Corporation Limited (HKG:535) is in debt. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Gemdale Properties and Investment
How much debt does Gemdale Properties and Investment have?
As you can see below, at the end of December 2021, Gemdale Properties and Investment had a debt of 23.0 billion Canadian yen, compared to 18.3 billion Canadian yen a year ago. Click on the image for more details. However, he has 8.77 billion Canadian yen in cash to offset this, resulting in a net debt of approximately 14.2 billion domestic yen.
A Look at Gemdale Properties and Investment Liabilities
We can see from the most recent balance sheet that Gemdale Properties and Investment had liabilities of 31.8 billion yen due within one year, and liabilities of 20.7 billion yen due beyond. In compensation for these obligations, it had cash of 8.77 billion yen as well as receivables valued at 7.07 billion yen due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 36.6 billion Canadian yen.
This deficit casts a shadow over the CN¥11.9b society, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, Gemdale Properties and Investment would likely need a major recapitalization if it were to pay its creditors today.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Gemdale Properties and Investment shareholders face the double whammy of a high net debt to EBITDA ratio (20.0) and quite low interest coverage, as EBIT is only 0.78x interest charges. The debt burden here is considerable. Worse still, Gemdale Properties and Investment has seen its EBIT plummet to 86% in the past 12 months. If earnings continue to follow this trajectory, paying off this debt will be more difficult than convincing us to run a marathon in the rain. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Gemdale Properties and Investment that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Gemdale Properties and Investment has barely had positive free cash flow, overall. Some might say that’s a concern, given how easily he could reduce his debt.
Our point of view
At first glance, Gemdale Properties and Investment’s EBIT growth rate left us hesitant about the stock, and its level of total liabilities was no more attractive than the single empty restaurant on its busiest night. year. And what’s more, its net debt to EBITDA also fails to inspire confidence. It seems to us that Gemdale Properties and Investment carries a heavy burden on the balance sheet. If you play with fire, you might get burned, so we’d probably give this stock a wide berth. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Gemdale Properties and Investment displays 4 warning signs in our investment analysis and 1 of them should not be ignored…
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.