Does CITIC Offshore Helicopter (SZSE:000099) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out 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¥158.7m at the end of September 2023, a reduction from CN¥482.3m over a year. But on the other hand it also has CN¥1.05b in cash, leading to a CN¥891.7m net cash position.

How Healthy Is CITIC Offshore Helicopter's Balance Sheet?

The latest balance sheet data shows that CITIC Offshore Helicopter had liabilities of CN¥565.0m due within a year, and liabilities of CN¥448.1m falling due after that. On the other hand, it had cash of CN¥1.05b and CN¥1.12b worth of receivables due within a year. So it can boast CN¥1.16b 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. Simply put, the fact that CITIC Offshore Helicopter has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that CITIC Offshore Helicopter has seen its EBIT plunge 11% in the last twelve months. 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 it is future earnings, more than anything, that will determine CITIC Offshore Helicopter'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, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, CITIC Offshore Helicopter's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case CITIC Offshore Helicopter has CN¥891.7m in net cash and a decent-looking balance sheet. So we don't have any problem with CITIC Offshore Helicopter's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of CITIC Offshore Helicopter's earnings per share history for free.

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.