Health Check: How Prudently Does China Travel International Investment Hong Kong (HKG:308) Use Debt?

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. As with many other companies China Travel International Investment Hong Kong Limited (HKG:308) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Travel International Investment Hong Kong

What Is China Travel International Investment Hong Kong's Net Debt?

As you can see below, at the end of June 2020, China Travel International Investment Hong Kong had HK$355.2m of debt, up from HK$82.4m a year ago. Click the image for more detail. However, it does have HK$3.34b in cash offsetting this, leading to net cash of HK$2.98b.

How Healthy Is China Travel International Investment Hong Kong's Balance Sheet?

We can see from the most recent balance sheet that China Travel International Investment Hong Kong had liabilities of HK$3.31b falling due within a year, and liabilities of HK$1.55b due beyond that. Offsetting this, it had HK$3.34b in cash and HK$650.1m in receivables that were due within 12 months. So it has liabilities totalling HK$869.6m more than its cash and near-term receivables, combined.

Since publicly traded China Travel International Investment Hong Kong shares are worth a total of HK$6.03b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, China Travel International Investment Hong Kong also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 China Travel International Investment Hong Kong's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year China Travel International Investment Hong Kong had a loss before interest and tax, and actually shrunk its revenue by 39%, to HK$2.8b. That makes us nervous, to say the least.

So How Risky Is China Travel International Investment Hong Kong?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months China Travel International Investment Hong Kong lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$585m of cash and made a loss of HK$476m. With only HK$2.98b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how China Travel International Investment Hong Kong's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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