Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt can lead to bankruptcy. Above all, Haichang Ocean Park Holdings Ltd. (HKG: 2255) carries a debt. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest analysis for Haichang Ocean Park Holdings

What is the debt of Haichang Ocean Park Holdings?

As you can see below, Haichang Ocean Park Holdings had a debt of 8.83 billion yuan, as of June 2021, which is roughly the same as the previous year. You can click on the graph for more details. However, he has CNN 1.75 billion in cash to compensate for this, which leads to net debt of around CNN 7.08 billion.

How healthy is Haichang Ocean Park Holdings’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Haichang Ocean Park Holdings had CN 5.03 billion in liabilities due within 12 months and CN 7.63 billion in liabilities beyond. In compensation for these obligations, he had cash of CNS 1.75 billion as well as receivables valued at CN 235.5 million due within 12 months. It therefore has liabilities totaling 10.7 billion yen more than its combined cash and short-term receivables.

Since this deficit is actually greater than the company’s market cap of 7.85 billion yen, we think shareholders should really watch Haichang Ocean Park Holdings’ debt levels, like a parent watching their child riding a bicycle for the first time. In theory, extremely large dilution would be required if the company were forced to repay debts by raising capital at the current share price. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Haichang Ocean Park Holdings will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

In the past year, Haichang Ocean Park Holdings was not profitable in EBIT level, but managed to increase its revenue by 6.2%, reaching 2.2 billion yen. This growth rate is a bit slow for our tastes, but it takes all types to make a world.

Emptor Warning

During the last twelve months, Haichang Ocean Park Holdings recorded a loss of profit before interest and taxes (EBIT). To be precise, the EBIT loss amounted to CNN 131 million. When we look at this alongside the material liabilities, we’re not particularly confident in the business. We would like to see big improvements in the short term before we get too interested in the title. It is fair to say that the loss of CND 853 million did not encourage us either; we would like to see a profit. In the meantime, we consider the title to be risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Haichang Ocean Park Holdings (at least 1 of concern), and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.