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. Importantly, Hefei Fengle Seed Co.,Ltd (SZSE:000713) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Hefei Fengle SeedLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Hefei Fengle SeedLtd had debt of CN¥193.6m, up from CN¥167.8m in one year. But on the other hand it also has CN¥371.9m in cash, leading to a CN¥178.3m net cash position.
A Look At Hefei Fengle SeedLtd's Liabilities
According to the last reported balance sheet, Hefei Fengle SeedLtd had liabilities of CN¥1.13b due within 12 months, and liabilities of CN¥167.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥371.9m as well as receivables valued at CN¥300.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥629.2m.
Given Hefei Fengle SeedLtd has a market capitalization of CN¥4.51b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hefei Fengle SeedLtd boasts net cash, 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 ultimately the future profitability of the business will decide if Hefei Fengle SeedLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Hefei Fengle SeedLtd reported revenue of CN¥3.0b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Hefei Fengle SeedLtd?
Although Hefei Fengle SeedLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥29m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hefei Fengle SeedLtd is showing 2 warning signs 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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