Is Qingdao Holdings International (HKG:499) Weighed On By Its Debt Load?

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. As with many other companies Qingdao Holdings International Limited (HKG:499) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Qingdao Holdings International

What Is Qingdao Holdings International's Debt?

As you can see below, Qingdao Holdings International had CN¥504.2m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥158.3m in cash, and so its net debt is CN¥345.9m.

How Strong Is Qingdao Holdings International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qingdao Holdings International had liabilities of CN¥885.3m due within 12 months and liabilities of CN¥8.39m due beyond that. Offsetting these obligations, it had cash of CN¥158.3m as well as receivables valued at CN¥187.1m due within 12 months. So it has liabilities totalling CN¥548.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥117.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Qingdao Holdings International would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Qingdao Holdings International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Qingdao Holdings International had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥42m. That's not what we would hope to see.

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). Its EBIT loss was a whopping CN¥13m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥47m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Qingdao Holdings International you should be aware of, and 2 of them make us uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.