Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Fosun International Limited (HKG:656) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Fosun International Carry?

You can click the graphic below for the historical numbers, but it shows that Fosun International had CN¥213.5b of debt in December 2023, down from CN¥228.9b, one year before. However, it does have CN¥152.6b in cash offsetting this, leading to net debt of about CN¥60.9b.

How Healthy Is Fosun International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fosun International had liabilities of CN¥210.1b due within 12 months and liabilities of CN¥389.8b due beyond that. Offsetting these obligations, it had cash of CN¥152.6b as well as receivables valued at CN¥81.2b due within 12 months. So its liabilities total CN¥365.9b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥34.0b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Fosun International would likely require a major re-capitalisation if it had to pay its creditors today. 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 Fosun International'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.

In the last year Fosun International wasn't profitable at an EBIT level, but managed to grow its revenue by 8.6%, to CN¥198b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Fosun International had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥4.8b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥2.2b in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. We've identified 1 warning sign with Fosun International , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.