Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does CITIC Offshore Helicopter Carry?

You can click the graphic below for the historical numbers, but it shows that CITIC Offshore Helicopter had CN¥159.9m of debt in March 2024, down from CN¥472.6m, one year before. However, its balance sheet shows it holds CN¥1.53b in cash, so it actually has CN¥1.37b net cash.

How Healthy Is CITIC Offshore Helicopter's Balance Sheet?

We can see from the most recent balance sheet that CITIC Offshore Helicopter had liabilities of CN¥537.9m falling due within a year, and liabilities of CN¥591.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥798.6m due within 12 months. So it actually has CN¥1.20b more liquid assets than total liabilities.

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

On top of that, CITIC Offshore Helicopter grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CITIC Offshore Helicopter can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CITIC Offshore Helicopter has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, CITIC Offshore Helicopter generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CITIC Offshore Helicopter has net cash of CN¥1.37b, as well as more liquid assets than liabilities. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in CN¥496m. So is CITIC Offshore Helicopter's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with CITIC Offshore Helicopter .

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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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.