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 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, Haima Automobile Co.,Ltd (SZSE:000572) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Haima AutomobileLtd
What Is Haima AutomobileLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Haima AutomobileLtd had CN¥191.8m of debt, an increase on CN¥100.0m, over one year. But on the other hand it also has CN¥644.9m in cash, leading to a CN¥453.1m net cash position.
A Look At Haima AutomobileLtd's Liabilities
We can see from the most recent balance sheet that Haima AutomobileLtd had liabilities of CN¥3.65b falling due within a year, and liabilities of CN¥171.2m due beyond that. On the other hand, it had cash of CN¥644.9m and CN¥1.88b worth of receivables due within a year. So it has liabilities totalling CN¥1.30b more than its cash and near-term receivables, combined.
Of course, Haima AutomobileLtd has a market capitalization of CN¥10.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Haima AutomobileLtd 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 you can't view debt in total isolation; since Haima AutomobileLtd 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 Haima AutomobileLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to CN¥2.6b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Haima AutomobileLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Haima AutomobileLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥341m of cash and made a loss of CN¥1.5b. With only CN¥453.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 2 warning signs for Haima AutomobileLtd (1 shouldn't be ignored) you should be aware of.
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.