Is Foshan Haitian Flavouring and Food (SHSE:603288) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 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?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does Foshan Haitian Flavouring and Food Carry?

As you can see below, at the end of June 2024, Foshan Haitian Flavouring and Food had CN¥664.8m of debt, up from CN¥260.6m a year ago. Click the image for more detail. However, it does have CN¥25.0b in cash offsetting this, leading to net cash of CN¥24.3b.

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

According to the last reported balance sheet, Foshan Haitian Flavouring and Food had liabilities of CN¥6.22b due within 12 months, and liabilities of CN¥416.5m due beyond 12 months. Offsetting this, it had CN¥25.0b in cash and CN¥270.8m in receivables that were due within 12 months. So it can boast CN¥18.6b 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!

The good news is that Foshan Haitian Flavouring and Food has increased its EBIT by 2.9% over twelve months, which should ease any concerns about debt repayment. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 70% 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 it is always sensible to investigate a company's debt, in this case Foshan Haitian Flavouring and Food has CN¥24.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in CN¥4.2b. So is Foshan Haitian Flavouring and Food's debt a risk? It doesn't seem so to us. 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. For example - Foshan Haitian Flavouring and Food has 1 warning sign we think you should be aware of.

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.