Does Great Wall Pan Asia Holdings (HKG: 583) have a healthy balance sheet?


Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Great Wall Pan Asia Holdings Limited (HKG: 583) uses debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Great Wall Pan Asia Holdings

What is the debt of Great Wall Pan Asia Holdings?

As you can see below, Great Wall Pan Asia Holdings had HK $ 4.75 billion in debt as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he has HK $ 229.4million in cash offsetting this, leading to net debt of around HK $ 4.52 billion.

SEHK: 583 History of debt to equity December 29, 2021

How healthy is Great Wall Pan Asia Holdings’ balance sheet?

According to the latest published balance sheet, Great Wall Pan Asia Holdings had a liability of HK $ 953.1 million due within 12 months and a liability of HK $ 4.32 billion due beyond 12 months. In return, he had HK $ 229.4 million in cash and HK $ 20.7 million in receivables due within 12 months. It therefore has liabilities totaling HK $ 5.02 billion more than its cash and short-term receivables combined.

The lack here weighs heavily on the HK $ 493.8million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We would therefore monitor its record closely, without a doubt. After all, Great Wall Pan Asia Holdings would likely need a major recapitalization if it were to pay its creditors today.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt versus earnings with and without amortization expenses.

Great Wall Pan Asia Holdings has a fairly high debt to EBITDA ratio of 7.3, which suggests significant leverage. But the good news is that it has a pretty comforting 4.0 times interest coverage, which suggests it can meet its obligations responsibly. The silver lining is that Great Wall Pan Asia Holdings increased its EBIT by 782% last year, which nurtures like idealism among the youth. If this earnings trend continues, its debt load will be much more manageable in the future. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Great Wall Pan Asia Holdings will need profits to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Great Wall Pan Asia Holdings has created free cash flow of 15% of EBIT, a performance without interest. This low level of cash conversion undermines its ability to manage and repay its debts.

Our point of view

At first glance, Great Wall Pan Asia Holdings’ net debt to EBITDA left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night. responsible for the year. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. Overall, it seems to us that Great Wall Pan Asia Holdings’ balance sheet is really a risk for the company. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 5 warning signs for Great Wall Pan Asia Holdings (2 don’t sit too well with us) you should be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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