Is Hainan Expressway (SZSE:000886) A Risky Investment?

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.' 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. Importantly, Hainan Expressway Co., Ltd. (SZSE:000886) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hainan Expressway

How Much Debt Does Hainan Expressway Carry?

As you can see below, at the end of September 2024, Hainan Expressway had CN¥144.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥654.0m in cash, leading to a CN¥509.8m net cash position.

How Strong Is Hainan Expressway's Balance Sheet?

We can see from the most recent balance sheet that Hainan Expressway had liabilities of CN¥283.1m falling due within a year, and liabilities of CN¥165.4m due beyond that. Offsetting these obligations, it had cash of CN¥654.0m as well as receivables valued at CN¥193.5m due within 12 months. So it actually has CN¥399.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Hainan Expressway could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hainan Expressway 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 Expressway 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.

In the last year Hainan Expressway wasn't profitable at an EBIT level, but managed to grow its revenue by 70%, to CN¥198m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hainan Expressway?

While Hainan Expressway lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥84m. 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. We think its revenue growth of 70% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Hainan Expressway (of which 1 is a bit concerning!) 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.