We Think Huatian Hotel GroupLtd (SZSE:000428) Has A Fair Chunk 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Huatian Hotel Group Co.,Ltd. (SZSE:000428) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Huatian Hotel GroupLtd

How Much Debt Does Huatian Hotel GroupLtd Carry?

As you can see below, Huatian Hotel GroupLtd had CN¥1.97b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥123.5m in cash leading to net debt of about CN¥1.85b.

How Healthy Is Huatian Hotel GroupLtd's Balance Sheet?

The latest balance sheet data shows that Huatian Hotel GroupLtd had liabilities of CN¥3.11b due within a year, and liabilities of CN¥424.7m falling due after that. Offsetting these obligations, it had cash of CN¥123.5m as well as receivables valued at CN¥349.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.06b.

This is a mountain of leverage relative to its market capitalization of CN¥4.03b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Huatian Hotel GroupLtd 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, Huatian Hotel GroupLtd reported revenue of CN¥634m, which is a gain of 6.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Huatian Hotel GroupLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥167m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥141m into a profit. So we do think this stock is quite risky. For riskier companies like Huatian Hotel GroupLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.