Foshan Haitian Flavouring and Food (SHSE:603288) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Foshan Haitian Flavouring and Food

What Is Foshan Haitian Flavouring and Food's 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. However, it does have CN¥25.8b in cash offsetting this, leading to net cash of CN¥25.4b.

How Healthy Is Foshan Haitian Flavouring and Food's Balance Sheet?

The latest balance sheet data shows that Foshan Haitian Flavouring and Food had liabilities of CN¥5.72b due within a year, and liabilities of CN¥403.7m falling due after that. Offsetting this, it had CN¥25.8b in cash and CN¥278.1m in receivables that were due within 12 months. So it actually has CN¥20.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Foshan Haitian Flavouring and Food could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Foshan Haitian Flavouring and Food boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Foshan Haitian Flavouring and Food has increased its EBIT by 7.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Foshan Haitian Flavouring and Food's ability to maintain a healthy balance sheet going forward. 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. While Foshan Haitian Flavouring and Food 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, 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 we empathize with investors who find debt concerning, you should keep in mind that Foshan Haitian Flavouring and Food has net cash of CN¥25.4b, as well as more liquid assets than liabilities. So we don't think Foshan Haitian Flavouring and Food'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Foshan Haitian Flavouring and Food you should know about.

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.