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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Haichang Ocean Park Holdings

What Is Haichang Ocean Park Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Haichang Ocean Park Holdings had CN¥5.91b of debt, an increase on CN¥5.05b, over one year. However, it also had CN¥1.81b in cash, and so its net debt is CN¥4.10b.

How Healthy Is Haichang Ocean Park Holdings' Balance Sheet?

According to the last reported balance sheet, Haichang Ocean Park Holdings had liabilities of CN¥2.92b due within 12 months, and liabilities of CN¥6.09b due beyond 12 months. On the other hand, it had cash of CN¥1.81b and CN¥46.2m worth of receivables due within a year. So its liabilities total CN¥7.15b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥6.01b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. 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 reported revenue of CN¥1.8b, which is a gain of 129%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Haichang Ocean Park Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥143m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥197m. In the meantime, we consider the stock to be risky. For riskier companies like Haichang Ocean Park Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.