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.' 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. As with many other companies CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CITIC Offshore Helicopter

What Is CITIC Offshore Helicopter's Net Debt?

The image below, which you can click on for greater detail, shows that CITIC Offshore Helicopter had debt of CN¥159.9m at the end of March 2024, a reduction from CN¥472.6m over a year. But on the other hand it also has CN¥1.53b in cash, leading to a CN¥1.37b net cash position.

How Healthy Is CITIC Offshore Helicopter's Balance Sheet?

According to the last reported balance sheet, CITIC Offshore Helicopter had liabilities of CN¥537.9m due within 12 months, and liabilities of CN¥591.5m due beyond 12 months. On the other hand, it had cash of CN¥1.53b and CN¥798.6m worth of receivables due within a year. So it can boast CN¥1.20b more liquid assets than total liabilities.

This surplus suggests that CITIC Offshore Helicopter has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CITIC Offshore Helicopter boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CITIC Offshore Helicopter has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. 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. CITIC Offshore Helicopter 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, CITIC Offshore Helicopter generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CITIC Offshore Helicopter has net cash of CN¥1.37b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥496m, being 94% of its EBIT. So we don't think CITIC Offshore Helicopter's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for CITIC Offshore Helicopter that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com