Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Haitian International Holdings Limited (HKG:1882) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Haitian International Holdings

What Is Haitian International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Haitian International Holdings had debt of CN¥999.2m at the end of June 2019, a reduction from CN¥1.42b over a year. However, it does have CN¥7.66b in cash offsetting this, leading to net cash of CN¥6.66b.

How Strong Is Haitian International Holdings's Balance Sheet?

According to the last reported balance sheet, Haitian International Holdings had liabilities of CN¥5.47b due within 12 months, and liabilities of CN¥276.8m due beyond 12 months. Offsetting this, it had CN¥7.66b in cash and CN¥2.84b in receivables that were due within 12 months. So it can boast CN¥4.75b more liquid assets than total liabilities.

This surplus suggests that Haitian International Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Haitian International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Haitian International Holdings's load is not too heavy, because its EBIT was down 30% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Haitian International Holdings 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.