The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Fujian Start Group Co.Ltd (SHSE:600734) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Fujian Start GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that Fujian Start GroupLtd had debt of CN¥117.8m at the end of March 2024, a reduction from CN¥131.7m over a year. But on the other hand it also has CN¥177.4m in cash, leading to a CN¥59.6m net cash position.

A Look At Fujian Start GroupLtd's Liabilities

We can see from the most recent balance sheet that Fujian Start GroupLtd had liabilities of CN¥393.8m falling due within a year, and liabilities of CN¥7.84m due beyond that. Offsetting these obligations, it had cash of CN¥177.4m as well as receivables valued at CN¥160.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥63.6m.

Having regard to Fujian Start GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Fujian Start GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Fujian Start GroupLtd made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥18m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fujian Start GroupLtd 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 Fujian Start 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. Considering the last year, Fujian Start GroupLtd actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about Fujian Start GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥59.6m. So we are not troubled with Fujian Start GroupLtd's debt use. 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. Be aware that Fujian Start GroupLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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