China Tobacco International (HK) (HKG:6055) Could Easily Take On More Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that China Tobacco International (HK) Company Limited (HKG:6055) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

What Is China Tobacco International (HK)'s Net Debt?

The image below, which you can click on for greater detail, shows that China Tobacco International (HK) had debt of HK$2.49b at the end of June 2025, a reduction from HK$2.86b over a year. But it also has HK$3.98b in cash to offset that, meaning it has HK$1.48b net cash.

How Strong Is China Tobacco International (HK)'s Balance Sheet?

According to the last reported balance sheet, China Tobacco International (HK) had liabilities of HK$6.22b due within 12 months, and liabilities of HK$77.4m due beyond 12 months. Offsetting this, it had HK$3.98b in cash and HK$2.20b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that China Tobacco International (HK)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$28.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, China Tobacco International (HK) also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for China Tobacco International (HK)

Fortunately, China Tobacco International (HK) grew its EBIT by 3.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China Tobacco International (HK) 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. China Tobacco International (HK) 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. During the last three years, China Tobacco International (HK) generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that China Tobacco International (HK) has HK$1.48b in net cash. And it impressed us with free cash flow of HK$1.8b, being 83% of its EBIT. So we don't think China Tobacco International (HK)'s use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Tobacco International (HK)'s earnings per share history for free.

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.