Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that FSPG Hi-Tech CO., Ltd. (SZSE:000973) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does FSPG Hi-Tech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 FSPG Hi-Tech had CN¥645.7m of debt, an increase on CN¥567.9m, over one year. However, it does have CN¥890.9m in cash offsetting this, leading to net cash of CN¥245.2m.

How Healthy Is FSPG Hi-Tech's Balance Sheet?

The latest balance sheet data shows that FSPG Hi-Tech had liabilities of CN¥754.4m due within a year, and liabilities of CN¥384.7m falling due after that. Offsetting this, it had CN¥890.9m in cash and CN¥507.7m in receivables that were due within 12 months. So it can boast CN¥259.5m more liquid assets than total liabilities.

This surplus suggests that FSPG Hi-Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FSPG Hi-Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that FSPG Hi-Tech's load is not too heavy, because its EBIT was down 24% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since FSPG Hi-Tech will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While FSPG Hi-Tech 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. Looking at the most recent three years, FSPG Hi-Tech recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that FSPG Hi-Tech has net cash of CN¥245.2m, as well as more liquid assets than liabilities. So we don't have any problem with FSPG Hi-Tech's use of debt. 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 be aware of the 3 warning signs we've spotted with FSPG Hi-Tech .

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.