We Think Hainan Haiqi Transportation GroupLtd (SHSE:603069) Has A Fair Chunk Of 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. We can see that Hainan Haiqi Transportation Group Co.,Ltd. (SHSE:603069) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Haiqi Transportation GroupLtd

What Is Hainan Haiqi Transportation GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Hainan Haiqi Transportation GroupLtd had debt of CN¥686.2m, up from CN¥595.8m in one year. However, it also had CN¥375.2m in cash, and so its net debt is CN¥310.9m.

A Look At Hainan Haiqi Transportation GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Hainan Haiqi Transportation GroupLtd had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥774.9m due beyond that. Offsetting these obligations, it had cash of CN¥375.2m as well as receivables valued at CN¥379.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.08b.

Of course, Hainan Haiqi Transportation GroupLtd has a market capitalization of CN¥5.76b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hainan Haiqi Transportation GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hainan Haiqi Transportation GroupLtd reported revenue of CN¥914m, which is a gain of 20%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Hainan Haiqi Transportation GroupLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥32m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥31m into a profit. So we do think this stock is quite risky. 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. We've identified 1 warning sign with Hainan Haiqi Transportation GroupLtd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.