Is China Travel International Investment Hong Kong (HKG:308) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, China Travel International Investment Hong Kong Limited (HKG:308) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See 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 June 2022 China Travel International Investment Hong Kong had HK$1.18b of debt, an increase on HK$656.4m, over one year. However, it does have HK$3.37b in cash offsetting this, leading to net cash of HK$2.19b.

A Look At China Travel International Investment Hong Kong's Liabilities

Zooming in on the latest balance sheet data, we can see that China Travel International Investment Hong Kong had liabilities of HK$5.01b due within 12 months and liabilities of HK$1.78b due beyond that. Offsetting this, it had HK$3.37b in cash and HK$664.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.75b.

This deficit isn't so bad because China Travel International Investment Hong Kong is worth HK$7.42b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. 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'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 wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to HK$3.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. And over the same period it saw negative free cash outflow of HK$546m and booked a HK$116m accounting loss. Given it only has net cash of HK$2.19b, the company may need to raise more capital if it doesn't reach break-even soon. China Travel International Investment Hong Kong's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with China Travel International Investment Hong Kong , and understanding them should be part of your investment process.

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.