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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Crystal International Group Limited (HKG:2232) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Crystal International Group

How Much Debt Does Crystal International Group Carry?

You can click the graphic below for the historical numbers, but it shows that Crystal International Group had US$117.5m of debt in June 2022, down from US$174.7m, one year before. However, it does have US$413.7m in cash offsetting this, leading to net cash of US$296.2m.

How Healthy Is Crystal International Group's Balance Sheet?

The latest balance sheet data shows that Crystal International Group had liabilities of US$611.5m due within a year, and liabilities of US$58.7m falling due after that. Offsetting this, it had US$413.7m in cash and US$327.7m in receivables that were due within 12 months. So it actually has US$71.3m 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!

The good news is that Crystal International Group has increased its EBIT by 5.5% over twelve months, which should ease any concerns about debt repayment. 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.

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 we empathize with investors who find debt concerning, you should keep in mind that Crystal International Group has net cash of US$296.2m, 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 is Crystal International Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Crystal International Group you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.