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. As with many other companies Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Foshan Haitian Flavouring and Food's Debt?

As you can see below, Foshan Haitian Flavouring and Food had CN¥393.4m of debt at September 2024, down from CN¥613.4m a year prior. However, it does have CN¥25.8b in cash offsetting this, leading to net cash of CN¥25.4b.

A Look At Foshan Haitian Flavouring and Food's Liabilities

We can see from the most recent balance sheet that Foshan Haitian Flavouring and Food had liabilities of CN¥5.72b falling due within a year, and liabilities of CN¥403.7m due beyond that. On the other hand, it had cash of CN¥25.8b and CN¥278.1m worth of receivables due within a year. So it can boast CN¥20.0b more liquid assets than total liabilities.

This surplus suggests that Foshan Haitian Flavouring and Food has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Foshan Haitian Flavouring and Food has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Foshan Haitian Flavouring and Food grew its EBIT by 7.2% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Foshan Haitian Flavouring and Food's ability to maintain a healthy balance sheet going forward. 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 Foshan Haitian Flavouring and Food 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. Over the most recent three years, Foshan Haitian Flavouring and Food recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Foshan Haitian Flavouring and Food has CN¥25.4b in net cash and a decent-looking balance sheet. So we don't think Foshan Haitian Flavouring and Food's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Foshan Haitian Flavouring and Food .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.