The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is Foshan Haitian Flavouring and Food's Net Debt?

As you can see below, Foshan Haitian Flavouring and Food had CN¥393.4m of debt at September 2024, down from CN¥613.4m a year prior. But on the other hand it also has CN¥25.8b in cash, leading to a CN¥25.4b net cash position.

A Look At Foshan Haitian Flavouring and Food's Liabilities

According to the last reported balance sheet, Foshan Haitian Flavouring and Food had liabilities of CN¥5.72b due within 12 months, and liabilities of CN¥403.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥25.8b as well as receivables valued at CN¥278.1m due within 12 months. So it can boast CN¥20.0b more liquid assets than total liabilities.

This surplus suggests that Foshan Haitian Flavouring and Food has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Foshan Haitian Flavouring and Food boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Foshan Haitian Flavouring and Food grew its EBIT by 7.2% in the last year, making that debt load look even more manageable. 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 Foshan Haitian Flavouring and Food 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Foshan Haitian Flavouring and Food 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. During the last three years, Foshan Haitian Flavouring and Food produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Foshan Haitian Flavouring and Food has CN¥25.4b in net cash and a decent-looking balance sheet. So we don't think Foshan Haitian Flavouring and Food's use of debt is risky. 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. For example, we've discovered 1 warning sign for Foshan Haitian Flavouring and Food that you should be aware of before investing here.

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.