Foshan Haitian Flavouring and Food (SHSE:603288) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Foshan Haitian Flavouring and Food

What Is Foshan Haitian Flavouring and Food's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Foshan Haitian Flavouring and Food had debt of CN¥683.1m, up from CN¥240.8m in one year. However, its balance sheet shows it holds CN¥26.9b in cash, so it actually has CN¥26.2b net cash.

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

We can see from the most recent balance sheet that Foshan Haitian Flavouring and Food had liabilities of CN¥5.85b falling due within a year, and liabilities of CN¥447.2m due beyond that. Offsetting these obligations, it had cash of CN¥26.9b as well as receivables valued at CN¥264.1m due within 12 months. So it actually has CN¥20.8b 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!

Foshan Haitian Flavouring and Food's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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. 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. Over the most recent three years, Foshan Haitian Flavouring and Food recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥26.2b, 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Foshan Haitian Flavouring and Food (including 1 which is significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.