We Think Crystal International Group (HKG:2232) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Crystal International Group

What Is Crystal International Group's Debt?

As you can see below, Crystal International Group had US$174.7m of debt at June 2021, down from US$283.2m a year prior. But on the other hand it also has US$419.6m in cash, leading to a US$245.0m net cash position.

A Look At Crystal International Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Crystal International Group had liabilities of US$635.7m due within 12 months and liabilities of US$55.2m due beyond that. Offsetting these obligations, it had cash of US$419.6m as well as receivables valued at US$280.3m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Crystal International Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.08b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Crystal International Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Crystal International Group grew its EBIT by 17% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 generation warms our hearts like a puppy in a bumblebee suit.

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$245.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in US$266m. So is Crystal International Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Crystal International Group has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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