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 Founder Technology Group Co.,Ltd. (SHSE:600601) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Founder Technology GroupLtd
What Is Founder Technology GroupLtd's Debt?
As you can see below, Founder Technology GroupLtd had CN¥283.8m of debt at September 2023, down from CN¥2.95b a year prior. But it also has CN¥959.6m in cash to offset that, meaning it has CN¥675.8m net cash.
How Strong Is Founder Technology GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Founder Technology GroupLtd had liabilities of CN¥1.49b due within 12 months and liabilities of CN¥184.9m due beyond that. Offsetting these obligations, it had cash of CN¥959.6m as well as receivables valued at CN¥1.16b due within 12 months. So it can boast CN¥440.7m more liquid assets than total liabilities.
This surplus suggests that Founder Technology GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Founder Technology GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Founder Technology 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.
In the last year Founder Technology GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥3.8b. That makes us nervous, to say the least.
So How Risky Is Founder Technology GroupLtd?
Although Founder Technology GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥133m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that Founder Technology GroupLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
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.