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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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.

What Is CITIC Offshore Helicopter's Net Debt?

As you can see below, CITIC Offshore Helicopter had CN¥159.8m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥1.39b in cash, so it actually has CN¥1.23b net cash.

How Strong Is CITIC Offshore Helicopter's Balance Sheet?

We can see from the most recent balance sheet that CITIC Offshore Helicopter had liabilities of CN¥575.7m falling due within a year, and liabilities of CN¥631.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.39b as well as receivables valued at CN¥1.08b due within 12 months. So it actually has CN¥1.27b 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!

Another good sign is that CITIC Offshore Helicopter has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CITIC Offshore Helicopter'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 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 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case CITIC Offshore Helicopter has CN¥1.23b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥566m, being 90% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for CITIC Offshore Helicopter that you should be aware of before investing here.

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.