Does Haichang Ocean Park Holdings (HKG:2255) Have A Healthy Balance Sheet?

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.' 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 note that Haichang Ocean Park Holdings Ltd. (HKG:2255) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that 2255 is potentially overvalued!

What Is Haichang Ocean Park Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Haichang Ocean Park Holdings had CN¥5.21b of debt in June 2022, down from CN¥8.83b, one year before. However, it does have CN¥2.01b in cash offsetting this, leading to net debt of about CN¥3.20b.

A Look At Haichang Ocean Park Holdings' Liabilities

We can see from the most recent balance sheet that Haichang Ocean Park Holdings had liabilities of CN¥3.43b falling due within a year, and liabilities of CN¥3.98b due beyond that. Offsetting these obligations, it had cash of CN¥2.01b as well as receivables valued at CN¥70.7m due within 12 months. So it has liabilities totalling CN¥5.32b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Haichang Ocean Park Holdings is worth CN¥26.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Haichang Ocean Park Holdings'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, Haichang Ocean Park Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 36%. That makes us nervous, to say the least.

Caveat Emptor

While Haichang Ocean Park Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥627m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥739m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Haichang Ocean Park Holdings (including 1 which is a bit concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.