China Yuanbang Property Holdings (SGX:BCD) is not lacking in debt


Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that China Yuanbang Property Holdings Limited (SGX:BCD) uses debt in its business. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for China Yuanbang Property Holdings

What is the net debt of China Yuanbang Property Holdings?

The image below, which you can click for more details, shows that China Yuanbang Property Holdings had 681.5 million yen in debt at the end of December 2021, a reduction from 710.4 million yen over a year. However, since it has a cash reserve of 43.9 million Canadian yen, its net debt is less, at around 637.5 million Canadian yen.

SGX:BCD Debt to Equity June 9, 2022

A look at the liabilities of China Yuanbang Property Holdings

The latest balance sheet data shows that China Yuanbang Property Holdings had liabilities of 1.43 billion yen maturing within one year, and liabilities of 412.5 million yen maturing thereafter. On the other hand, it had a cash position of 43.9 million Canadian yen and 101.6 million national yen of receivables due within one year. It therefore has liabilities totaling 1.70 billion Canadian yen more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the company itself, 77.4 million yen, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet. We would therefore be watching his balance sheet closely, no doubt. After all, China Yuanbang Property Holdings 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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

China Yuanbang Property Holdings has a fairly high debt to EBITDA ratio of 16.6, suggesting significant leverage. But the good news is that it has a pretty comforting 3.8x interest coverage, suggesting it can meet its obligations responsibly. Worse still, China Yuanbang Property Holdings has seen its EBIT drop 80% in the past 12 months. If earnings continue to follow this trajectory, paying off that debt will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since China Yuanbang Property Holdings will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, China Yuanbang Property Holdings’ free cash flow has been 26% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.

Our point of view

To be frank, China Yuanbang Property Holdings’ EBIT growth rate and track record of keeping total liabilities under control makes us rather uncomfortable with its level of leverage. Moreover, its interest coverage also fails to inspire confidence. After reviewing the data points discussed, we believe that China Yuanbang Property Holdings has too much debt. That kind of risk is acceptable to some, but it certainly doesn’t float our boat. 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 outside of the balance sheet. For example, we have identified 3 warning signs for China Yuanbang Property Holdings (2 are potentially serious) of which you should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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.


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