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.' 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. We can see that Founder Technology Group Co.,Ltd. (SHSE:600601) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Founder Technology GroupLtd's Net Debt?

As you can see below, Founder Technology GroupLtd had CN¥296.8m of debt at March 2024, down from CN¥354.4m a year prior. But on the other hand it also has CN¥865.1m in cash, leading to a CN¥568.3m net cash position.

A Look At Founder Technology GroupLtd's Liabilities

The latest balance sheet data shows that Founder Technology GroupLtd had liabilities of CN¥1.34b due within a year, and liabilities of CN¥420.6m falling due after that. Offsetting this, it had CN¥865.1m in cash and CN¥1.16b in receivables that were due within 12 months. So it actually has CN¥270.2m more liquid assets than total liabilities.

This state of affairs indicates that Founder Technology GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥14.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Founder Technology GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Founder Technology GroupLtd turned things around in the last 12 months, delivering and EBIT of CN¥214m. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Founder Technology GroupLtd 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. During the last year, Founder Technology GroupLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Founder Technology GroupLtd has CN¥568.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Founder Technology GroupLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Founder Technology GroupLtd's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com