Is China Travel International Investment Hong Kong (HKG:308) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, China Travel International Investment Hong Kong Limited (HKG:308) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for China Travel International Investment Hong Kong

What Is China Travel International Investment Hong Kong's Debt?

The image below, which you can click on for greater detail, shows that China Travel International Investment Hong Kong had debt of HK$970.5m at the end of June 2023, a reduction from HK$1.18b over a year. However, it does have HK$3.21b in cash offsetting this, leading to net cash of HK$2.24b.

How Healthy Is China Travel International Investment Hong Kong's Balance Sheet?

The latest balance sheet data shows that China Travel International Investment Hong Kong had liabilities of HK$3.99b due within a year, and liabilities of HK$1.73b falling due after that. Offsetting this, it had HK$3.21b in cash and HK$720.7m in receivables that were due within 12 months. So it has liabilities totalling HK$1.80b more than its cash and near-term receivables, combined.

This deficit isn't so bad because China Travel International Investment Hong Kong is worth HK$7.20b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, China Travel International Investment Hong Kong also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although China Travel International Investment Hong Kong made a loss at the EBIT level, last year, it was also good to see that it generated HK$170m in EBIT over the last twelve months. 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 China Travel International Investment Hong Kong'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Travel International Investment Hong Kong 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. During the last year, China Travel International Investment Hong Kong burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While China Travel International Investment Hong Kong does have more liabilities than liquid assets, it also has net cash of HK$2.24b. So we are not troubled with China Travel International Investment Hong Kong's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in China Travel International Investment Hong Kong, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.