David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Haitian International Holdings Limited (HKG:1882) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Haitian International Holdings's Net Debt?

As you can see below, at the end of December 2023, Haitian International Holdings had CN¥2.75b of debt, up from CN¥1.44b a year ago. Click the image for more detail. But on the other hand it also has CN¥11.0b in cash, leading to a CN¥8.21b net cash position.

How Healthy Is Haitian International Holdings' Balance Sheet?

The latest balance sheet data shows that Haitian International Holdings had liabilities of CN¥7.50b due within a year, and liabilities of CN¥2.75b falling due after that. Offsetting this, it had CN¥11.0b in cash and CN¥3.83b in receivables that were due within 12 months. So it actually has CN¥4.54b more liquid assets than total liabilities.

This surplus suggests that Haitian International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Haitian International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Haitian International Holdings grew its EBIT by 8.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Haitian International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Haitian International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Haitian International Holdings's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Haitian International Holdings has net cash of CN¥8.21b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 8.4% in the last twelve months. So we don't think Haitian International Holdings's use of debt is 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. Case in point: We've spotted 1 warning sign for Haitian International Holdings you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com