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 Hainan Haiqi Transportation Group Co.,Ltd. (SHSE:603069) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Hainan Haiqi Transportation GroupLtd
How Much Debt Does Hainan Haiqi Transportation GroupLtd Carry?
As you can see below, at the end of June 2022, Hainan Haiqi Transportation GroupLtd had CN¥320.9m of debt, up from CN¥140.3m a year ago. Click the image for more detail. However, it does have CN¥202.7m in cash offsetting this, leading to net debt of about CN¥118.2m.
SHSE:603069 Debt to Equity History October 22nd 2022How Healthy Is Hainan Haiqi Transportation GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hainan Haiqi Transportation GroupLtd had liabilities of CN¥638.7m due within 12 months and liabilities of CN¥343.4m due beyond that. Offsetting this, it had CN¥202.7m in cash and CN¥168.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥610.8m more than its cash and near-term receivables, combined.
Given Hainan Haiqi Transportation GroupLtd has a market capitalization of CN¥7.19b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Hainan Haiqi Transportation GroupLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Hainan Haiqi Transportation GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 4.4%, to CN¥724m. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Hainan Haiqi Transportation GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥74m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥255m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Hainan Haiqi Transportation GroupLtd .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.