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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ground International Development Limited (HKG:989) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ground International Development

How Much Debt Does Ground International Development Carry?

As you can see below, Ground International Development had CN¥1.15b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had CN¥30.1m in cash, and so its net debt is CN¥1.12b.

A Look At Ground International Development's Liabilities

We can see from the most recent balance sheet that Ground International Development had liabilities of CN¥1.65b falling due within a year, and liabilities of CN¥855.9m due beyond that. Offsetting this, it had CN¥30.1m in cash and CN¥518.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.95b.

This deficit casts a shadow over the CN¥832.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Ground International Development would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.