Health Check: How Prudently Does Qingdao Holdings International (HKG:499) 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. We can see that Qingdao Holdings International Limited (HKG:499) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Qingdao Holdings International

What Is Qingdao Holdings International's Debt?

You can click the graphic below for the historical numbers, but it shows that Qingdao Holdings International had CN¥508.4m of debt in June 2023, down from CN¥558.8m, one year before. On the flip side, it has CN¥157.3m in cash leading to net debt of about CN¥351.1m.

A Look At Qingdao Holdings International's Liabilities

Zooming in on the latest balance sheet data, we can see that Qingdao Holdings International had liabilities of CN¥432.7m due within 12 months and liabilities of CN¥351.7m due beyond that. Offsetting these obligations, it had cash of CN¥157.3m as well as receivables valued at CN¥164.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥462.6m.

This deficit casts a shadow over the CN¥71.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Qingdao Holdings International would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Qingdao Holdings International will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Qingdao Holdings International had a loss before interest and tax, and actually shrunk its revenue by 41%, to CN¥38m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Qingdao Holdings International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥12m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥104m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Qingdao Holdings International , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.