Warren Buffett famously said, '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 company. Importantly, Hainan Yedao (Group) Co.,Ltd (SHSE:600238) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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 company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Hainan Yedao (Group)Ltd
What Is Hainan Yedao (Group)Ltd's Debt?
As you can see below, Hainan Yedao (Group)Ltd had CN¥307.6m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥28.5m in cash leading to net debt of about CN¥279.1m.
A Look At Hainan Yedao (Group)Ltd's Liabilities
Zooming in on the latest balance sheet data, we can see that Hainan Yedao (Group)Ltd had liabilities of CN¥647.7m due within 12 months and liabilities of CN¥139.7m due beyond that. Offsetting this, it had CN¥28.5m in cash and CN¥185.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥573.2m.
Since publicly traded Hainan Yedao (Group)Ltd shares are worth a total of CN¥4.12b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hainan Yedao (Group)Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Hainan Yedao (Group)Ltd had a loss before interest and tax, and actually shrunk its revenue by 65%, to CN¥245m. That makes us nervous, to say the least.
Caveat Emptor
Not only did Hainan Yedao (Group)Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥195m. 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¥24m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hainan Yedao (Group)Ltd has 1 warning sign we think you should be aware of.
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.