Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kerry Properties Limited (HKG:683) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kerry Properties

What Is Kerry Properties's Net Debt?

The image below, which you can click on for greater detail, shows that Kerry Properties had debt of HK$35.3b at the end of December 2018, a reduction from HK$40.1b over a year. On the flip side, it has HK$14.8b in cash leading to net debt of about HK$20.6b.

A Look At Kerry Properties's Liabilities

According to the last reported balance sheet, Kerry Properties had liabilities of HK$23.8b due within 12 months, and liabilities of HK$35.4b due beyond 12 months. Offsetting these obligations, it had cash of HK$14.8b as well as receivables valued at HK$416.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$44.1b.

When you consider that this deficiency exceeds the company's HK$43.1b market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.