Is China Travel International Investment Hong Kong (HKG:308) A Risky Investment?

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.' 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. We can see that China Travel International Investment Hong Kong Limited (HKG:308) does use debt in its business. 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. 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. 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 China Travel International Investment Hong Kong had HK$1.43b of debt, an increase on HK$1.09b, over one year. However, its balance sheet shows it holds HK$3.19b in cash, so it actually has HK$1.76b net cash.

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

The latest balance sheet data shows that China Travel International Investment Hong Kong had liabilities of HK$4.09b due within a year, and liabilities of HK$1.69b falling due after that. Offsetting this, it had HK$3.19b in cash and HK$664.5m in receivables that were due within 12 months. So its liabilities total HK$1.93b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since China Travel International Investment Hong Kong has a market capitalization of HK$8.80b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, China Travel International Investment Hong Kong boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Travel International Investment Hong Kong can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year China Travel International Investment Hong Kong had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$3.0b. That's not what we would hope to see.

So How Risky Is China Travel International Investment Hong Kong?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China Travel International Investment Hong Kong had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$1.1b of cash and made a loss of HK$356m. With only HK$1.76b 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. For riskier companies like China Travel International Investment Hong Kong 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.