Is Hainan Development HoldingsNanhai (SZSE:002163) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Hainan Development HoldingsNanhai

How Much Debt Does Hainan Development HoldingsNanhai Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Hainan Development HoldingsNanhai had debt of CN¥633.3m, up from CN¥543.1m in one year. However, its balance sheet shows it holds CN¥1.25b in cash, so it actually has CN¥617.8m net cash.

How Healthy Is Hainan Development HoldingsNanhai's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hainan Development HoldingsNanhai had liabilities of CN¥3.77b due within 12 months and liabilities of CN¥1.04b due beyond that. Offsetting this, it had CN¥1.25b in cash and CN¥2.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.39b.

This deficit isn't so bad because Hainan Development HoldingsNanhai is worth CN¥5.91b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Hainan Development HoldingsNanhai boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hainan Development HoldingsNanhai 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.

In the last year Hainan Development HoldingsNanhai wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥4.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Hainan Development HoldingsNanhai?

While Hainan Development HoldingsNanhai lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥92m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hainan Development HoldingsNanhai .

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.

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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.