Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Hainan Haiqi Transportation Group Co.,Ltd. (SHSE:603069) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hainan Haiqi Transportation GroupLtd

What Is Hainan Haiqi Transportation GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Hainan Haiqi Transportation GroupLtd had debt of CN¥642.5m, up from CN¥377.9m in one year. On the flip side, it has CN¥296.5m in cash leading to net debt of about CN¥346.0m.

A Look At Hainan Haiqi Transportation GroupLtd's Liabilities

We can see from the most recent balance sheet that Hainan Haiqi Transportation GroupLtd had liabilities of CN¥553.4m falling due within a year, and liabilities of CN¥775.2m due beyond that. Offsetting these obligations, it had cash of CN¥296.5m as well as receivables valued at CN¥242.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥789.8m.

Since publicly traded Hainan Haiqi Transportation GroupLtd shares are worth a total of CN¥5.47b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Hainan Haiqi Transportation GroupLtd'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 Hainan Haiqi Transportation GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to CN¥859m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Hainan Haiqi Transportation GroupLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥25m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥152m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hainan Haiqi Transportation GroupLtd (of which 2 shouldn't be ignored!) you should know about.

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.