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. As with many other companies Shanghai Fudan Forward S&T Co., Ltd (SHSE:600624) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Shanghai Fudan Forward S&T
What Is Shanghai Fudan Forward S&T's Debt?
The chart below, which you can click on for greater detail, shows that Shanghai Fudan Forward S&T had CN¥491.1m in debt in September 2023; about the same as the year before. However, it also had CN¥293.8m in cash, and so its net debt is CN¥197.3m.
A Look At Shanghai Fudan Forward S&T's Liabilities
According to the last reported balance sheet, Shanghai Fudan Forward S&T had liabilities of CN¥706.9m due within 12 months, and liabilities of CN¥185.0m due beyond 12 months. Offsetting this, it had CN¥293.8m in cash and CN¥91.2m in receivables that were due within 12 months. So its liabilities total CN¥506.9m more than the combination of its cash and short-term receivables.
Given Shanghai Fudan Forward S&T has a market capitalization of CN¥3.81b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Shanghai Fudan Forward S&T 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.
Over 12 months, Shanghai Fudan Forward S&T made a loss at the EBIT level, and saw its revenue drop to CN¥731m, which is a fall of 13%. We would much prefer see growth.
Caveat Emptor
Not only did Shanghai Fudan Forward S&T's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥7.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥35m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanghai Fudan Forward S&T that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.