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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Fuyao Glass Industry Group Co., Ltd. (SHSE:600660) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fuyao Glass Industry Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Fuyao Glass Industry Group had debt of CN¥16.0b, up from CN¥15.1b in one year. However, its balance sheet shows it holds CN¥20.6b in cash, so it actually has CN¥4.68b net cash.

How Healthy Is Fuyao Glass Industry Group's Balance Sheet?

According to the last reported balance sheet, Fuyao Glass Industry Group had liabilities of CN¥15.6b due within 12 months, and liabilities of CN¥11.2b due beyond 12 months. Offsetting these obligations, it had cash of CN¥20.6b as well as receivables valued at CN¥9.39b due within 12 months. So it can boast CN¥3.21b more liquid assets than total liabilities.

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

On top of that, Fuyao Glass Industry Group grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fuyao Glass Industry Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Fuyao Glass Industry Group 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. During the last three years, Fuyao Glass Industry Group produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fuyao Glass Industry Group has CN¥4.68b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 52% over the last year. So we don't think Fuyao Glass Industry Group's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Fuyao Glass Industry Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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