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.' 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 note that China Travel International Investment Hong Kong Limited (HKG:308) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 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 at December 2021 China Travel International Investment Hong Kong had debt of HK$1.09b, up from HK$660.8m in one year. However, it does have HK$3.57b in cash offsetting this, leading to net cash of HK$2.48b.

A Look At China Travel International Investment Hong Kong's Liabilities

We can see from the most recent balance sheet that China Travel International Investment Hong Kong had liabilities of HK$4.87b falling due within a year, and liabilities of HK$1.82b due beyond that. Offsetting these obligations, it had cash of HK$3.57b as well as receivables valued at HK$629.2m due within 12 months. So its liabilities total HK$2.49b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China Travel International Investment Hong Kong is worth HK$8.53b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Travel International Investment Hong Kong can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, China Travel International Investment Hong Kong reported revenue of HK$3.6b, which is a gain of 85%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is China Travel International Investment Hong Kong?

Although China Travel International Investment Hong Kong had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$174m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for China Travel International Investment Hong Kong shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. 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 China Travel International Investment Hong Kong you should know about.

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.