These 4 Measures Indicate That Foshan Haitian Flavouring and Food (SHSE:603288) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Foshan Haitian Flavouring and Food

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

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Foshan Haitian Flavouring and Food had CN¥613.4m of debt, an increase on CN¥177.0m, over one year. But it also has CN¥24.9b in cash to offset that, meaning it has CN¥24.3b net cash.

How Healthy 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¥6.25b falling due within a year, and liabilities of CN¥582.0m due beyond that. Offsetting this, it had CN¥24.9b in cash and CN¥199.1m in receivables that were due within 12 months. So it can boast CN¥18.3b 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!

On the other hand, Foshan Haitian Flavouring and Food's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥24.3b, as well as more liquid assets than liabilities. So we are not troubled with Foshan Haitian Flavouring and Food's debt use. 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 instance, we've identified 1 warning sign for Foshan Haitian Flavouring and Food that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.