Health Check: How Prudently Does Haima AutomobileLtd (SZSE:000572) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Haima Automobile Co.,Ltd (SZSE:000572) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Haima AutomobileLtd

How Much Debt Does Haima AutomobileLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Haima AutomobileLtd had CN¥220.2m of debt, an increase on CN¥69.0m, over one year. But it also has CN¥678.0m in cash to offset that, meaning it has CN¥457.8m net cash.

A Look At Haima AutomobileLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Haima AutomobileLtd had liabilities of CN¥4.22b due within 12 months and liabilities of CN¥160.4m due beyond that. Offsetting these obligations, it had cash of CN¥678.0m as well as receivables valued at CN¥2.53b due within 12 months. So its liabilities total CN¥1.17b more than the combination of its cash and short-term receivables.

Haima AutomobileLtd has a market capitalization of CN¥4.82b, 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. While it does have liabilities worth noting, Haima AutomobileLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Haima AutomobileLtd will need earnings to service that debt. 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.

Over 12 months, Haima AutomobileLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.0b, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Haima AutomobileLtd?

Although Haima AutomobileLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥571m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. For riskier companies like Haima AutomobileLtd 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com