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.' 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. Importantly, Fujian Snowman Co., Ltd. (SZSE:002639) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Fujian Snowman
What Is Fujian Snowman's Debt?
The chart below, which you can click on for greater detail, shows that Fujian Snowman had CN¥828.5m in debt in September 2023; about the same as the year before. However, because it has a cash reserve of CN¥435.2m, its net debt is less, at about CN¥393.2m.
A Look At Fujian Snowman's Liabilities
We can see from the most recent balance sheet that Fujian Snowman had liabilities of CN¥1.91b falling due within a year, and liabilities of CN¥117.8m due beyond that. On the other hand, it had cash of CN¥435.2m and CN¥1.12b worth of receivables due within a year. So its liabilities total CN¥480.6m more than the combination of its cash and short-term receivables.
Given Fujian Snowman has a market capitalization of CN¥6.24b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Fujian Snowman's earnings that will influence how the balance sheet holds up in the future. 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, Fujian Snowman made a loss at the EBIT level, and saw its revenue drop to CN¥2.0b, which is a fall of 5.9%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Fujian Snowman produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥132m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥60m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Be aware that Fujian Snowman is showing 1 warning sign in our investment analysis , you should know about...
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.