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.' 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 Fujian Foxit Software Development Joint Stock Co., Ltd. (SHSE:688095) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Fujian Foxit Software Development's Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Fujian Foxit Software Development had debt of CN¥42.6m, up from none in one year. But it also has CN¥2.05b in cash to offset that, meaning it has CN¥2.01b net cash.
A Look At Fujian Foxit Software Development's Liabilities
According to the last reported balance sheet, Fujian Foxit Software Development had liabilities of CN¥380.4m due within 12 months, and liabilities of CN¥35.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.05b as well as receivables valued at CN¥106.9m due within 12 months. So it actually has CN¥1.75b more liquid assets than total liabilities.
This surplus strongly suggests that Fujian Foxit Software Development has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Fujian Foxit Software Development boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fujian Foxit Software Development 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.
Over 12 months, Fujian Foxit Software Development reported revenue of CN¥637m, which is a gain of 9.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Fujian Foxit Software Development?
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 Fujian Foxit Software Development had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥39m of cash and made a loss of CN¥98m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.01b. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Fujian Foxit Software Development 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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