Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Founder Technology Group Co.,Ltd. (SHSE:600601) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Founder Technology GroupLtd Carry?
The image below, which you can click on for greater detail, shows that Founder Technology GroupLtd had debt of CN¥283.8m at the end of September 2023, a reduction from CN¥2.95b over a year. But it also has CN¥959.6m in cash to offset that, meaning it has CN¥675.8m net cash.
A Look At Founder Technology GroupLtd's Liabilities
We can see from the most recent balance sheet that Founder Technology GroupLtd had liabilities of CN¥1.49b falling due within a year, and liabilities of CN¥184.9m due beyond that. On the other hand, it had cash of CN¥959.6m and CN¥1.16b worth of receivables due within a year. So it actually has CN¥440.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Founder Technology GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 it is Founder Technology GroupLtd's earnings that will influence how the balance sheet holds up in the future. 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. To be frank that doesn't bode well.
So How Risky Is Founder Technology GroupLtd?
While Founder Technology GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥133m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 1 warning sign we've spotted with Founder Technology GroupLtd .
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.