Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” 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 Travel to China International Investment Hong Kong Limited (HKG:308) 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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for China Travel International Investment Hong Kong
How much debt does China Travel International Investment Hong Kong carry?
The image below, which you can click on for more details, shows that China Travel International Investment Hong Kong had HK$613.3 million in debt at the end of December 2021, a reduction from 660.8 million HK dollars over one year. But on the other hand, it also has HK$3.57 billion in cash, resulting in a net cash position of HK$2.96 billion.
How strong is China Travel International Investment’s balance sheet in Hong Kong?
The latest balance sheet data shows that China Travel International Investment Hong Kong had liabilities of HK$4.87 billion due within one year, and liabilities of HK$1.82 billion falling due thereafter. . On the other hand, it had cash of HK$3.57 billion and HK$629.2 million of receivables due within one year. It therefore has liabilities totaling HK$2.49 billion more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since China Travel International Investment Hong Kong has a market capitalization of HK$8.03 billion, so it could likely bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. Despite its notable liabilities, China Travel International Investment Hong Kong has clean cash, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Travel International Investment Hong Kong’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year-over-year, China Travel International Investment Hong Kong reported revenue of HK$3.6 billion, an 85% gain, although it reported no earnings before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.
So, how risky is China Travel International Investment Hong Kong?
Although China Travel International Investment Hong Kong posted a loss of earnings before interest and tax (EBIT) in the last twelve months, it made a statutory profit of HK$174 million. So taking that at face value, and considering the money, we don’t think it’s very risky in the short term. The good news for shareholders of China Travel International Investment Hong Kong is that its revenue growth is strong, making it easier to raise capital when needed. But we still think it’s somewhat risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that China Travel International Investment Hong Kong shows 1 warning sign in our investment analysis you should know…
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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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.