Hainan Development HoldingsNanhai (SZSE:002163) Is Carrying A Fair Bit Of Debt

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.' 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 Hainan Development HoldingsNanhai Co., Ltd. (SZSE:002163) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Hainan Development HoldingsNanhai

What Is Hainan Development HoldingsNanhai's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hainan Development HoldingsNanhai had debt of CN¥782.1m, up from CN¥729.2m in one year. However, it also had CN¥659.5m in cash, and so its net debt is CN¥122.6m.

A Look At Hainan Development HoldingsNanhai's Liabilities

Zooming in on the latest balance sheet data, we can see that Hainan Development HoldingsNanhai had liabilities of CN¥3.57b due within 12 months and liabilities of CN¥1.01b due beyond that. Offsetting this, it had CN¥659.5m in cash and CN¥2.45b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.48b more than its cash and near-term receivables, combined.

Given Hainan Development HoldingsNanhai has a market capitalization of CN¥8.36b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Hainan Development HoldingsNanhai has virtually no net debt, 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 Hainan Development HoldingsNanhai will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hainan Development HoldingsNanhai saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Hainan Development HoldingsNanhai had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥51m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥5.7m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hainan Development HoldingsNanhai (of which 1 is potentially serious!) you should know about.

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.