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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Fujian Expressway Development Co.,Ltd (SHSE:600033) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Fujian Expressway DevelopmentLtd
What Is Fujian Expressway DevelopmentLtd's Debt?
The image below, which you can click on for greater detail, shows that Fujian Expressway DevelopmentLtd had debt of CN¥1.15b at the end of September 2023, a reduction from CN¥2.00b over a year. But on the other hand it also has CN¥1.16b in cash, leading to a CN¥6.66m net cash position.
A Look At Fujian Expressway DevelopmentLtd's Liabilities
The latest balance sheet data shows that Fujian Expressway DevelopmentLtd had liabilities of CN¥1.03b due within a year, and liabilities of CN¥2.08b falling due after that. On the other hand, it had cash of CN¥1.16b and CN¥889.9m worth of receivables due within a year. So it has liabilities totalling CN¥1.06b more than its cash and near-term receivables, combined.
Of course, Fujian Expressway DevelopmentLtd has a market capitalization of CN¥8.95b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Fujian Expressway DevelopmentLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although Fujian Expressway DevelopmentLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥380m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fujian Expressway DevelopmentLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Fujian Expressway DevelopmentLtd 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. Over the most recent year, Fujian Expressway DevelopmentLtd recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While Fujian Expressway DevelopmentLtd does have more liabilities than liquid assets, it also has net cash of CN¥6.66m. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in CN¥278m. So we don't think Fujian Expressway DevelopmentLtd's use of debt is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Fujian Expressway DevelopmentLtd (including 1 which makes us a bit uncomfortable) .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.