Is Haichang Ocean Park Holdings (HKG:2255) Using Debt In A Risky Way?

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.' 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. As with many other companies Haichang Ocean Park Holdings Ltd. (HKG:2255) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Haichang Ocean Park Holdings

What Is Haichang Ocean Park Holdings's Net Debt?

As you can see below, Haichang Ocean Park Holdings had CN¥8.83b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥1.75b in cash leading to net debt of about CN¥7.08b.

How Healthy Is Haichang Ocean Park Holdings' Balance Sheet?

According to the last reported balance sheet, Haichang Ocean Park Holdings had liabilities of CN¥5.03b due within 12 months, and liabilities of CN¥7.63b due beyond 12 months. Offsetting this, it had CN¥1.75b in cash and CN¥235.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥10.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥4.98b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Haichang Ocean Park Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Haichang Ocean Park Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Haichang Ocean Park Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to CN¥2.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Haichang Ocean Park Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥151m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥79m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Haichang Ocean Park Holdings has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.
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