CITIC Offshore Helicopter (SZSE:000099) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for CITIC Offshore Helicopter

What Is CITIC Offshore Helicopter's Debt?

The chart below, which you can click on for greater detail, shows that CITIC Offshore Helicopter had CN¥159.8m in debt in September 2024; about the same as the year before. 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 short term liquidity is a sign that CITIC Offshore Helicopter could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CITIC Offshore Helicopter boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, CITIC Offshore Helicopter grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 CITIC Offshore Helicopter 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, CITIC Offshore Helicopter recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for CITIC Offshore Helicopter 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.