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.' 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 Expressway Development Co.,Ltd (SHSE:600033) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Fujian Expressway DevelopmentLtd's Net Debt?
As you can see below, Fujian Expressway DevelopmentLtd had CN¥1.02b of debt at June 2024, down from CN¥1.27b a year prior. However, its balance sheet shows it holds CN¥1.60b in cash, so it actually has CN¥577.5m net cash.
How Strong Is Fujian Expressway DevelopmentLtd's Balance Sheet?
We can see from the most recent balance sheet that Fujian Expressway DevelopmentLtd had liabilities of CN¥1.80b falling due within a year, and liabilities of CN¥1.47b due beyond that. On the other hand, it had cash of CN¥1.60b and CN¥987.0m worth of receivables due within a year. So it has liabilities totalling CN¥693.9m more than its cash and near-term receivables, combined.
Since publicly traded Fujian Expressway DevelopmentLtd shares are worth a total of CN¥9.17b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Fujian Expressway DevelopmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Fujian Expressway DevelopmentLtd has increased its EBIT by 6.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fujian Expressway DevelopmentLtd 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fujian Expressway DevelopmentLtd 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. Over the last three years, Fujian Expressway DevelopmentLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
We could understand if investors are concerned about Fujian Expressway DevelopmentLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥577.5m. And it impressed us with free cash flow of CN¥1.4b, being 101% of its EBIT. So is Fujian Expressway DevelopmentLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Fujian Expressway DevelopmentLtd is showing 1 warning sign in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
