Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does CITIC Offshore Helicopter Carry?

As you can see below, CITIC Offshore Helicopter had CN¥143.8m of debt at June 2024, down from CN¥252.5m a year prior. But on the other hand it also has CN¥1.34b in cash, leading to a CN¥1.20b net cash position.

A Look At CITIC Offshore Helicopter's Liabilities

The latest balance sheet data shows that CITIC Offshore Helicopter had liabilities of CN¥541.3m due within a year, and liabilities of CN¥596.4m falling due after that. Offsetting this, it had CN¥1.34b in cash and CN¥1.04b in receivables that were due within 12 months. So it actually has CN¥1.24b 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. Succinctly put, CITIC Offshore Helicopter boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CITIC Offshore Helicopter has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CITIC Offshore Helicopter 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, CITIC Offshore Helicopter recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually 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¥1.20b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥447m, being 96% of its EBIT. So we don't think CITIC Offshore Helicopter's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with CITIC Offshore Helicopter , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.