Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Fu Shou Yuan International Group Limited (HKG:1448) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fu Shou Yuan International Group's Debt?

As you can see below, at the end of December 2023, Fu Shou Yuan International Group had CN¥229.4m of debt, up from CN¥33.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.24b in cash, so it actually has CN¥3.01b net cash.

A Look At Fu Shou Yuan International Group's Liabilities

We can see from the most recent balance sheet that Fu Shou Yuan International Group had liabilities of CN¥1.26b falling due within a year, and liabilities of CN¥835.7m due beyond that. Offsetting this, it had CN¥3.24b in cash and CN¥235.9m in receivables that were due within 12 months. So it can boast CN¥1.38b more liquid assets than total liabilities.

This short term liquidity is a sign that Fu Shou Yuan International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fu Shou Yuan International Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Fu Shou Yuan International Group has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fu Shou Yuan International Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fu Shou Yuan International 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. During the last three years, Fu Shou Yuan International Group generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fu Shou Yuan International Group has CN¥3.01b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.2b, being 82% of its EBIT. So is Fu Shou Yuan International Group's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Fu Shou Yuan International Group's dividend history, without delay!

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.