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. We note that China Travel International Investment Hong Kong Limited (HKG:308) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China Travel International Investment Hong Kong's Net Debt?

As you can see below, at the end of June 2024, China Travel International Investment Hong Kong had HK$1.94b of debt, up from HK$970.5m a year ago. Click the image for more detail. But it also has HK$3.25b in cash to offset that, meaning it has HK$1.31b net cash.

How Strong Is China Travel International Investment Hong Kong's Balance Sheet?

We can see from the most recent balance sheet that China Travel International Investment Hong Kong had liabilities of HK$4.24b falling due within a year, and liabilities of HK$2.61b due beyond that. On the other hand, it had cash of HK$3.25b and HK$619.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.99b.

This deficit isn't so bad because China Travel International Investment Hong Kong is worth HK$5.32b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, China Travel International Investment Hong Kong boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that China Travel International Investment Hong Kong grew its EBIT by 221% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. China Travel International Investment Hong Kong 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. Over the last two years, China Travel International Investment Hong Kong saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While China Travel International Investment Hong Kong does have more liabilities than liquid assets, it also has net cash of HK$1.31b. And it impressed us with its EBIT growth of 221% over the last year. So we are not troubled with China Travel International Investment Hong Kong's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China Travel International Investment Hong Kong is showing 2 warning signs in our investment analysis , you should know about...

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.