Is Crystal International Group (HKG:2232) Using Too Much Debt?

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 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. We note that Crystal International Group Limited (HKG:2232) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Crystal International Group

How Much Debt Does Crystal International Group Carry?

The image below, which you can click on for greater detail, shows that Crystal International Group had debt of US$73.2m at the end of June 2023, a reduction from US$117.5m over a year. However, its balance sheet shows it holds US$536.6m in cash, so it actually has US$463.4m net cash.

A Look At Crystal International Group's Liabilities

We can see from the most recent balance sheet that Crystal International Group had liabilities of US$544.3m falling due within a year, and liabilities of US$62.5m due beyond that. Offsetting this, it had US$536.6m in cash and US$274.7m in receivables that were due within 12 months. So it can boast US$204.5m more liquid assets than total liabilities.

This excess liquidity suggests that Crystal International Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Crystal International Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Crystal International Group has increased its EBIT by 4.7% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Crystal International Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Crystal International Group 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. Over the last three years, Crystal International Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Crystal International Group has US$463.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$296m, being 127% of its EBIT. So we don't think Crystal International Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Crystal International Group you should be aware of.

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. 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.