Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, FESCO Group Co., Ltd. (SHSE:600861) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FESCO Group

How Much Debt Does FESCO Group Carry?

As you can see below, at the end of June 2023, FESCO Group had CN¥6.52b of debt, up from CN¥72.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥7.81b in cash, leading to a CN¥1.29b net cash position.

How Strong Is FESCO Group's Balance Sheet?

According to the last reported balance sheet, FESCO Group had liabilities of CN¥9.17b due within 12 months, and liabilities of CN¥307.9m due beyond 12 months. On the other hand, it had cash of CN¥7.81b and CN¥6.62b worth of receivables due within a year. So it can boast CN¥4.95b more liquid assets than total liabilities.

This surplus strongly suggests that FESCO Group 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. Simply put, the fact that FESCO Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if FESCO Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year FESCO Group had a loss before interest and tax, and actually shrunk its revenue by 71%, to CN¥4.5b. To be frank that doesn't bode well.

So How Risky Is FESCO Group?

Although FESCO Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥423m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for FESCO Group that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.