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 Longxi Bearing (Group) Co., Ltd (SHSE:600592) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

What Is Fujian Longxi Bearing (Group)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Fujian Longxi Bearing (Group) had CN¥228.4m of debt in June 2024, down from CN¥407.2m, one year before. However, it does have CN¥956.2m in cash offsetting this, leading to net cash of CN¥727.8m.

A Look At Fujian Longxi Bearing (Group)'s Liabilities

The latest balance sheet data shows that Fujian Longxi Bearing (Group) had liabilities of CN¥505.0m due within a year, and liabilities of CN¥604.2m falling due after that. Offsetting this, it had CN¥956.2m in cash and CN¥888.9m in receivables that were due within 12 months. So it can boast CN¥735.9m more liquid assets than total liabilities.

This surplus suggests that Fujian Longxi Bearing (Group) is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Fujian Longxi Bearing (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Fujian Longxi Bearing (Group) grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fujian Longxi Bearing (Group) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Fujian Longxi Bearing (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Fujian Longxi Bearing (Group) 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

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Longxi Bearing (Group) has net cash of CN¥727.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 36% over the last year. So is Fujian Longxi Bearing (Group)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Fujian Longxi Bearing (Group) that you should be aware of before investing here.

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.