Is Haima AutomobileLtd (SZSE:000572) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Haima Automobile Co.,Ltd (SZSE:000572) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Haima AutomobileLtd

How Much Debt Does Haima AutomobileLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Haima AutomobileLtd had debt of CN¥191.8m, up from CN¥100.0m in one year. But it also has CN¥644.9m in cash to offset that, meaning it has CN¥453.1m net cash.

A Look At Haima AutomobileLtd's Liabilities

According to the last reported balance sheet, Haima AutomobileLtd had liabilities of CN¥3.65b due within 12 months, and liabilities of CN¥171.2m due beyond 12 months. Offsetting this, it had CN¥644.9m in cash and CN¥1.88b in receivables that were due within 12 months. So its liabilities total CN¥1.30b more than the combination of its cash and short-term receivables.

Of course, Haima AutomobileLtd has a market capitalization of CN¥6.87b, 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of CN¥2.6b, which is a gain of 9.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Haima AutomobileLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Haima AutomobileLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥341m of cash and made a loss of CN¥1.5b. But at least it has CN¥453.1m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Haima AutomobileLtd that you should be aware of before investing here.

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.