Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Haichang Ocean Park Holdings Ltd. (HKG:2255) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Haichang Ocean Park Holdings's Net Debt?
As you can see below, at the end of December 2023, Haichang Ocean Park Holdings had CN¥5.91b of debt, up from CN¥5.05b a year ago. Click the image for more detail. However, it does have CN¥1.81b in cash offsetting this, leading to net debt of about CN¥4.10b.
A Look At Haichang Ocean Park Holdings' Liabilities
We can see from the most recent balance sheet that Haichang Ocean Park Holdings had liabilities of CN¥2.92b falling due within a year, and liabilities of CN¥6.09b due beyond that. On the other hand, it had cash of CN¥1.81b and CN¥46.2m worth of receivables due within a year. So it has liabilities totalling CN¥7.15b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's CN¥6.01b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Haichang Ocean Park Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Haichang Ocean Park Holdings reported revenue of CN¥1.8b, which is a gain of 129%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
Caveat Emptor
Even though Haichang Ocean Park Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥143m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥197m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like Haichang Ocean Park Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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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.