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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Haichang Ocean Park Holdings Ltd. (HKG:2255) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Haichang Ocean Park Holdings

What Is Haichang Ocean Park Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Haichang Ocean Park Holdings had CN¥5.05b in debt in December 2022; about the same as the year before. On the flip side, it has CN¥1.35b in cash leading to net debt of about CN¥3.70b.

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¥2.64b falling due within a year, and liabilities of CN¥4.89b due beyond that. On the other hand, it had cash of CN¥1.35b and CN¥55.8m worth of receivables due within a year. So its liabilities total CN¥6.12b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥8.26b, so it does suggest shareholders should keep an eye on Haichang Ocean Park Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Haichang Ocean Park Holdings had a loss before interest and tax, and actually shrunk its revenue by 68%, to CN¥793m. To be frank that doesn't bode well.

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. Indeed, it lost a very considerable CN¥854m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥721m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 1 warning sign for Haichang Ocean Park Holdings you should be aware of.

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.