Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies FS Development Investment Holdings (SZSE:300071) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is FS Development Investment Holdings's Net Debt?

As you can see below, at the end of September 2024, FS Development Investment Holdings had CN¥111.7m of debt, up from CN¥18.0m a year ago. Click the image for more detail. On the flip side, it has CN¥17.7m in cash leading to net debt of about CN¥94.0m.

A Look At FS Development Investment Holdings' Liabilities

According to the last reported balance sheet, FS Development Investment Holdings had liabilities of CN¥925.0m due within 12 months, and liabilities of CN¥216.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥17.7m as well as receivables valued at CN¥1.04b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥86.6m.

This state of affairs indicates that FS Development Investment Holdings' 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¥6.27b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, FS Development Investment Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since FS Development Investment Holdings 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.

In the last year FS Development Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months FS Development Investment Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥56m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥125m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for FS Development Investment Holdings 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.