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. As with many other companies Huatian Hotel Group Co.,Ltd. (SZSE:000428) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Huatian Hotel GroupLtd
How Much Debt Does Huatian Hotel GroupLtd Carry?
The chart below, which you can click on for greater detail, shows that Huatian Hotel GroupLtd had CN¥2.02b in debt in September 2023; about the same as the year before. However, it also had CN¥142.4m in cash, and so its net debt is CN¥1.88b.
How Healthy Is Huatian Hotel GroupLtd's Balance Sheet?
The latest balance sheet data shows that Huatian Hotel GroupLtd had liabilities of CN¥3.21b due within a year, and liabilities of CN¥546.9m falling due after that. Offsetting these obligations, it had cash of CN¥142.4m as well as receivables valued at CN¥78.5m due within 12 months. So its liabilities total CN¥3.53b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CN¥3.90b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Huatian Hotel GroupLtd 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 Huatian Hotel GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥596m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Huatian Hotel GroupLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥167m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥228m into a profit. So we do think this stock is quite risky. For riskier companies like Huatian Hotel GroupLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
