First, shares rose 37.5% through Wednesday’s close. Then they retreated 13.1% Thursday. Since close of trading last week, that works out to a net 18.8% gain for Evergrande stock.
Now ordinarily, if a stock gained 19% in a little less than a week, you’d think that it had some good news to report, but that hasn’t been the case for Evergrande. To the contrary, since Friday last week, we’ve received confirmation that Evergrande has missed not one but two separate deadlines for paying interest on its debt, totaling $131 million in missed obligations.
Granted, Evergrande is technically still within 30-day grace periods during which it can cure its defaults, which occurred on Sept. 23 and 29.
Also granted, Evergrande said on Wednesday that it has reached a deal to raise $1.5 billion from selling its stake in Shengjing Bank, which should give it the cash it needs to cure those defaults if it wanted to.
But here’s the thing: Evergrande’s total debt load isn’t $131 million or even $1.5 billion — but $305 billion. Although in theory, the company’s $368 billion in assets (according to data from S&P Global Market Intelligence) should be enough to pay off that debt, the past week has shown us that theory and reality may be two very different things.
Evergrande is clearly not out of the woods yet, and until it demonstrates an ability to pay its bills, investors jumping into the stock may be jumping the gun.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.