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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hainan Haiqi Transportation Group Co.,Ltd. (SHSE:603069) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hainan Haiqi Transportation GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hainan Haiqi Transportation GroupLtd had debt of CN¥813.4m, up from CN¥642.5m in one year. However, it also had CN¥348.6m in cash, and so its net debt is CN¥464.8m.

How Healthy Is Hainan Haiqi Transportation GroupLtd's Balance Sheet?

According to the last reported balance sheet, Hainan Haiqi Transportation GroupLtd had liabilities of CN¥952.0m due within 12 months, and liabilities of CN¥919.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥348.6m as well as receivables valued at CN¥398.3m due within 12 months. So its liabilities total CN¥1.12b more than the combination of its cash and short-term receivables.

Of course, Hainan Haiqi Transportation GroupLtd has a market capitalization of CN¥6.45b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hainan Haiqi Transportation GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hainan Haiqi Transportation GroupLtd reported revenue of CN¥876m, which is a gain of 2.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Hainan Haiqi Transportation GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥36m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥116m of cash over the last year. So suffice it to say we do consider the stock to be 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. To that end, you should be aware of the 1 warning sign we've spotted with Hainan Haiqi Transportation GroupLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.