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.' 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 Travel International Investment Hong Kong Limited (HKG:308) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

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

The image below, which you can click on for greater detail, shows that at December 2023 China Travel International Investment Hong Kong had debt of HK$2.38b, up from HK$1.43b in one year. However, it does have HK$3.26b in cash offsetting this, leading to net cash of HK$880.2m.

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

We can see from the most recent balance sheet that China Travel International Investment Hong Kong had liabilities of HK$4.21b falling due within a year, and liabilities of HK$2.55b due beyond that. Offsetting this, it had HK$3.26b in cash and HK$521.6m in receivables that were due within 12 months. So it has liabilities totalling HK$2.98b 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$6.98b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

It was also good to see that despite losing money on the EBIT line last year, China Travel International Investment Hong Kong turned things around in the last 12 months, delivering and EBIT of HK$582m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. Considering the last year, China Travel International Investment Hong Kong actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While China Travel International Investment Hong Kong does have more liabilities than liquid assets, it also has net cash of HK$880.2m. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.