Here's Why Crystal International Group (HKG:2232) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Crystal International Group Limited (HKG:2232) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Crystal International Group

How Much Debt Does Crystal International Group Carry?

As you can see below, Crystal International Group had US$178.4m of debt at December 2020, down from US$277.4m a year prior. However, it does have US$383.4m in cash offsetting this, leading to net cash of US$205.0m.

How Healthy Is Crystal International Group's Balance Sheet?

According to the last reported balance sheet, Crystal International Group had liabilities of US$574.6m due within 12 months, and liabilities of US$43.6m due beyond 12 months. On the other hand, it had cash of US$383.4m and US$286.8m worth of receivables due within a year. So it can boast US$52.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Crystal International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Crystal International Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Crystal International Group's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Crystal International Group 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 Crystal International Group 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, Crystal International Group recorded free cash flow worth 52% 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 Crystal International Group has US$205.0m in net cash and a decent-looking balance sheet. So we are not troubled with Crystal International Group's debt use. 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 example, we've discovered 3 warning signs for Crystal International Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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