Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 CITIC Offshore Helicopter

How Much Debt Does CITIC Offshore Helicopter Carry?

The image below, which you can click on for greater detail, shows that CITIC Offshore Helicopter had debt of CN¥481.7m at the end of June 2022, a reduction from CN¥675.0m over a year. However, its balance sheet shows it holds CN¥1.65b in cash, so it actually has CN¥1.17b net cash.

How Strong Is CITIC Offshore Helicopter's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CITIC Offshore Helicopter had liabilities of CN¥671.5m due within 12 months and liabilities of CN¥786.7m due beyond that. On the other hand, it had cash of CN¥1.65b and CN¥1.07b worth of receivables due within a year. So it can boast CN¥1.26b more liquid assets than total liabilities.

This excess liquidity suggests that CITIC Offshore Helicopter is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that CITIC Offshore Helicopter has more cash than debt is arguably a good indication that it can manage its debt safely.

CITIC Offshore Helicopter's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CITIC Offshore Helicopter 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CITIC Offshore Helicopter 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, CITIC Offshore Helicopter 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 it is always sensible to investigate a company's debt, in this case CITIC Offshore Helicopter has CN¥1.17b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in CN¥197m. So is CITIC Offshore Helicopter's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for CITIC Offshore Helicopter you should be aware of.

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.