David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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 Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 chart below, which you can click on for greater detail, shows that Fuyao Glass Industry Group had CN¥17.3b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥19.5b in cash, so it actually has CN¥2.17b net cash.
How Strong Is Fuyao Glass Industry Group's Balance Sheet?
According to the last reported balance sheet, Fuyao Glass Industry Group had liabilities of CN¥18.1b due within 12 months, and liabilities of CN¥10.4b due beyond 12 months. On the other hand, it had cash of CN¥19.5b and CN¥9.89b worth of receivables due within a year. So it actually has CN¥887.4m more liquid assets than total liabilities.
This state of affairs indicates that Fuyao Glass Industry Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥133.0b company is short on cash, but still worth keeping an eye on the balance sheet. 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 48% over the last twelve months, and that growth will make it easier to handle its debt. 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 Fuyao Glass Industry Group can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Fuyao Glass Industry Group recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Fuyao Glass Industry Group has CN¥2.17b in net cash and a decent-looking balance sheet. And we liked the look of last year's 48% year-on-year EBIT growth. So is Fuyao Glass Industry Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Fuyao Glass Industry Group .
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.