These 4 Measures Indicate That Crystal International Group (HKG:2232) Is Using Debt Safely

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. 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?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Crystal International Group

What Is Crystal International Group's Net Debt?

As you can see below, Crystal International Group had US$167.6m of debt at December 2021, down from US$178.4m a year prior. However, it does have US$401.3m in cash offsetting this, leading to net cash of US$233.7m.

How Healthy Is Crystal International Group's Balance Sheet?

The latest balance sheet data shows that Crystal International Group had liabilities of US$611.2m due within a year, and liabilities of US$55.0m falling due after that. Offsetting these obligations, it had cash of US$401.3m as well as receivables valued at US$341.6m due within 12 months. So it actually has US$76.7m 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!

On top of that, Crystal International Group grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Crystal International Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Crystal International Group has net cash of US$233.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$124m, being 124% of its EBIT. So we don't think Crystal International Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs 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.