Is Haichang Ocean Park Holdings (HKG:2255) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Haichang Ocean Park Holdings Ltd. (HKG:2255) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Haichang Ocean Park Holdings

What Is Haichang Ocean Park Holdings's Debt?

As you can see below, at the end of June 2023, Haichang Ocean Park Holdings had CN¥5.55b of debt, up from CN¥5.21b a year ago. Click the image for more detail. However, it also had CN¥1.79b in cash, and so its net debt is CN¥3.77b.

How Strong Is Haichang Ocean Park Holdings' Balance Sheet?

We can see from the most recent balance sheet that Haichang Ocean Park Holdings had liabilities of CN¥2.45b falling due within a year, and liabilities of CN¥5.61b due beyond that. Offsetting this, it had CN¥1.79b in cash and CN¥83.2m in receivables that were due within 12 months. So its liabilities total CN¥6.19b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥9.09b. 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 ultimately the future profitability of the business will decide if Haichang Ocean Park Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Haichang Ocean Park Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 7.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Haichang Ocean Park Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥469m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥721m of cash over the last year. So in short it's a really risky stock. For riskier companies like Haichang Ocean Park Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.