Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Foshan Yowant Technology Co.,Ltd (SZSE:002291) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Foshan Yowant TechnologyLtd
How Much Debt Does Foshan Yowant TechnologyLtd Carry?
The image below, which you can click on for greater detail, shows that Foshan Yowant TechnologyLtd had debt of CN¥675.9m at the end of September 2022, a reduction from CN¥958.1m over a year. But it also has CN¥1.16b in cash to offset that, meaning it has CN¥481.7m net cash.
How Strong Is Foshan Yowant TechnologyLtd's Balance Sheet?
We can see from the most recent balance sheet that Foshan Yowant TechnologyLtd had liabilities of CN¥1.45b falling due within a year, and liabilities of CN¥68.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.16b as well as receivables valued at CN¥1.65b due within 12 months. So it actually has CN¥1.29b more liquid assets than total liabilities.
This surplus suggests that Foshan Yowant TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Foshan Yowant TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Foshan Yowant TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Foshan Yowant TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to CN¥4.2b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Foshan Yowant TechnologyLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Foshan Yowant TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥788m and booked a CN¥349m accounting loss. With only CN¥481.7m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Foshan Yowant TechnologyLtd may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Foshan Yowant TechnologyLtd that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.