Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Fujian Start Group Co.Ltd (SHSE:600734) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Fujian Start GroupLtd's Debt?
As you can see below, Fujian Start GroupLtd had CN¥125.7m of debt at December 2023, down from CN¥139.1m a year prior. However, its balance sheet shows it holds CN¥236.2m in cash, so it actually has CN¥110.5m net cash.
A Look At Fujian Start GroupLtd's Liabilities
We can see from the most recent balance sheet that Fujian Start GroupLtd had liabilities of CN¥442.5m falling due within a year, and liabilities of CN¥10.3m due beyond that. On the other hand, it had cash of CN¥236.2m and CN¥90.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥126.7m.
This state of affairs indicates that Fujian Start GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.38b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Fujian Start GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Fujian Start GroupLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥48m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Fujian Start GroupLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fujian Start GroupLtd 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 last year, Fujian Start GroupLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Fujian Start GroupLtd has CN¥110.5m in net cash. So we are not troubled with Fujian Start GroupLtd's debt use. 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 Fujian Start GroupLtd you should know about.
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.