Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hao Tian International Construction Investment Group Limited (HKG:1341) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Hao Tian International Construction Investment Group's Debt?
As you can see below, Hao Tian International Construction Investment Group had HK$138.6m of debt at March 2019, down from HK$218.2m a year prior. But on the other hand it also has HK$254.1m in cash, leading to a HK$115.5m net cash position.
A Look At Hao Tian International Construction Investment Group's Liabilities
We can see from the most recent balance sheet that Hao Tian International Construction Investment Group had liabilities of HK$211.9m falling due within a year, and liabilities of HK$101.6m due beyond that. Offsetting this, it had HK$254.1m in cash and HK$248.6m in receivables that were due within 12 months. So it can boast HK$189.1m more liquid assets than total liabilities.
This surplus suggests that Hao Tian International Construction Investment Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hao Tian International Construction Investment Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hao Tian International Construction Investment Group's earnings that will influence how the balance sheet holds up in the future. 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 Hao Tian International Construction Investment Group managed to grow its revenue by 6.4%, to HK$177m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Hao Tian International Construction Investment Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Hao Tian International Construction Investment Group had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through HK$149m of cash and made a loss of HK$6.5m. However, it has net cash of HK$254m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Hao Tian International Construction Investment Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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