Is Hainan Development HoldingsNanhai (SZSE:002163) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 March 2024 Hainan Development HoldingsNanhai had debt of CN¥743.3m, up from CN¥634.2m in one year. But on the other hand it also has CN¥917.9m in cash, leading to a CN¥174.6m net cash position.

How Healthy Is Hainan Development HoldingsNanhai's Balance Sheet?

We can see from the most recent balance sheet that Hainan Development HoldingsNanhai had liabilities of CN¥3.61b falling due within a year, and liabilities of CN¥1.04b due beyond that. Offsetting this, it had CN¥917.9m in cash and CN¥2.28b in receivables that were due within 12 months. So its liabilities total CN¥1.45b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hainan Development HoldingsNanhai has a market capitalization of CN¥4.95b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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, Hainan Development HoldingsNanhai also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hainan Development HoldingsNanhai's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hainan Development HoldingsNanhai reported revenue of CN¥4.2b, which is a gain of 10.0%, 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 Hainan Development HoldingsNanhai?

Although Hainan Development HoldingsNanhai had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥96m. So taking that on face value, and considering the cash, we don't think its very risky in the near 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Hainan Development HoldingsNanhai .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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