Is Haima AutomobileLtd (SZSE:000572) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Haima Automobile Co.,Ltd (SZSE:000572) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Haima AutomobileLtd

What Is Haima AutomobileLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Haima AutomobileLtd had CN¥249.2m of debt, an increase on CN¥191.8m, over one year. However, it does have CN¥435.7m in cash offsetting this, leading to net cash of CN¥186.5m.

A Look At Haima AutomobileLtd's Liabilities

According to the last reported balance sheet, Haima AutomobileLtd had liabilities of CN¥3.68b due within 12 months, and liabilities of CN¥155.8m due beyond 12 months. On the other hand, it had cash of CN¥435.7m and CN¥2.76b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥639.7m.

Of course, Haima AutomobileLtd has a market capitalization of CN¥7.75b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Haima AutomobileLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Haima AutomobileLtd'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.

Over 12 months, Haima AutomobileLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is Haima AutomobileLtd?

While Haima AutomobileLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥3.6m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Haima AutomobileLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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

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.