Is China Travel International Investment Hong Kong (HKG:308) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that China Travel International Investment Hong Kong Limited (HKG:308) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Travel International Investment Hong Kong

How Much Debt Does China Travel International Investment Hong Kong Carry?

The image below, which you can click on for greater detail, shows that China Travel International Investment Hong Kong had debt of HK$613.3m at the end of December 2021, a reduction from HK$660.8m over a year. But on the other hand it also has HK$3.57b in cash, leading to a HK$2.96b net cash position.

How Strong 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$4.87b due within a year, and liabilities of HK$1.82b falling due after that. On the other hand, it had cash of HK$3.57b and HK$629.2m worth of receivables due within a year. So it has liabilities totalling HK$2.49b more than its cash and near-term receivables, combined.

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$8.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, China Travel International Investment Hong Kong reported revenue of HK$3.6b, which is a gain of 85%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is China Travel International Investment Hong Kong?

Although China Travel International Investment Hong Kong had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$174m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for China Travel International Investment Hong Kong shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China Travel International Investment Hong Kong is showing 1 warning sign in our investment analysis , you should know about...

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. 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.