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.' 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. As with many other companies Minmetals Land Limited (HKG:230) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Minmetals Land

What Is Minmetals Land's Net Debt?

As you can see below, Minmetals Land had HK$15.1b of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of HK$3.67b, its net debt is less, at about HK$11.4b.

How Healthy Is Minmetals Land's Balance Sheet?

The latest balance sheet data shows that Minmetals Land had liabilities of HK$18.3b due within a year, and liabilities of HK$14.2b falling due after that. Offsetting this, it had HK$3.67b in cash and HK$9.42b in receivables that were due within 12 months. So its liabilities total HK$19.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$4.25b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Minmetals Land would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.