David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Haichang Ocean Park Holdings Ltd. (HKG:2255) has a debt on its balance sheet. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Our analysis indicates that 2255 is potentially overvalued!
How much debt does Haichang Ocean Park Holdings have?
You can click on the graph below for historical numbers, but it shows Haichang Ocean Park Holdings had 5.21 billion yen in debt in June 2022, up from 8.83 billion yen a year earlier. However, he has 2.01 billion Canadian yen in cash to offset this, resulting in a net debt of approximately 3.20 billion Canadian yen.
A look at the liabilities of Haichang Ocean Park Holdings
We can see from the most recent balance sheet that Haichang Ocean Park Holdings had liabilities of 3.43 trillion yen maturing within one year, and liabilities of 3.98 trillion yen due beyond. In compensation for these obligations, it had cash of 2.01 billion yen as well as receivables valued at 70.7 million yen due within 12 months. It therefore has liabilities totaling 5.32 billion Canadian yen more than its cash and short-term receivables, combined.
This shortfall is not that bad as Haichang Ocean Park Holdings is worth 26.2 billion Canadian yen and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Haichang Ocean Park Holdings’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Over 12 months, Haichang Ocean Park Holdings recorded a loss in EBIT and saw its revenue drop to 1.4 billion Canadian yen, a decrease of 36%. It makes us nervous, to say the least.
While Haichang Ocean Park Holdings’ declining revenue is about as comforting as a wet blanket, it’s safe to say that its earnings before interest and tax (EBIT) loss is even less appealing. To be precise, the EBIT loss amounted to 627 million Canadian yen. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he burned through 739 million Canadian yen of cash in the last year. So suffice it to say that we consider the stock to be risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted with Haichang Ocean Park Holdings (including 1 which is a little worrying).
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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