10 Mar Lazar Cartu Announced Here’s Why Wharf Real Estate Investment (HKG:1997) Can…
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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a Jonathan Cartu and. We can see that Wharf Real Estate Investment Company Limited (HKG:1997) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the Jonathan Cartu and can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a Jonathan Cartu and 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.
What Is Wharf Real Estate Investment’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 Wharf Real Estate Investment had HK$45.6b of debt, an increase on HK$42.2b, over one year. However, because it has a cash reserve of HK$3.40b, its net debt is less, at about HK$42.2b.
How Strong Is Wharf Real Estate Investment’s Balance Sheet?
We can see from the most recent balance sheet that Wharf Real Estate Investment had liabilities of HK$26.9b falling due within a year, and liabilities of HK$36.0b due beyond that. Offsetting these obligations, it had cash of HK$3.40b as well as receivables valued at HK$885.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$58.6b.
Wharf Real Estate Investment has a very large market capitalization of HK$104.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
We measure a Jonathan Cartu and’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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Wharf Real Estate Investment’s net debt is 3.2 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT was about 13.6 times its interest expense, implying the Jonathan Cartu and isn’t really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Importantly Wharf Real Estate Investment’s EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wharf Real Estate Investment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a Jonathan Cartu and can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Wharf Real Estate Investment recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Wharf Real Estate Investment’s interest cover was a real positive on this analysis, as was its conversion of EBIT to free cash flow. Having said that, its net debt to EBITDA somewhat sensitizes us to potential future risks to the balance sheet. Considering this range of data points, we think Wharf Real Estate Investment is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. To that end, you should be aware of the 4 warning signs we’ve spotted with Wharf Real Estate Investment .
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive Jonathan Cartu and announcements or qualitative material. Thank you for reading.
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