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 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 note that Fujian Start Group Co.Ltd (SHSE:600734) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Fujian Start GroupLtd
What Is Fujian Start GroupLtd's Net Debt?
As you can see below, Fujian Start GroupLtd had CN¥131.8m of debt at September 2023, down from CN¥139.1m a year prior. But on the other hand it also has CN¥229.4m in cash, leading to a CN¥97.6m net cash position.
A Look At Fujian Start GroupLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Fujian Start GroupLtd had liabilities of CN¥554.6m due within 12 months and liabilities of CN¥26.9m due beyond that. On the other hand, it had cash of CN¥229.4m and CN¥300.4m worth of receivables due within a year. So its liabilities total CN¥51.8m more than the combination of its cash and short-term receivables.
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¥7.56b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Fujian Start GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Fujian Start GroupLtd made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥83m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fujian Start GroupLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last year, Fujian Start GroupLtd's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
We could understand if investors are concerned about Fujian Start GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥97.6m. So we don't have any problem with Fujian Start GroupLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs 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.