Warren Buffett famously said, '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. As with many other companies Chengdu Fusen Noble-House Industrial Co.,Ltd. (SZSE:002818) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Chengdu Fusen Noble-House IndustrialLtd's Debt?

As you can see below, at the end of September 2024, Chengdu Fusen Noble-House IndustrialLtd had CN¥14.0m of debt, up from CN¥10.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.62b in cash, leading to a CN¥1.60b net cash position.

A Look At Chengdu Fusen Noble-House IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Chengdu Fusen Noble-House IndustrialLtd had liabilities of CN¥1.34b due within 12 months and liabilities of CN¥16.3m due beyond that. On the other hand, it had cash of CN¥1.62b and CN¥121.2m worth of receivables due within a year. So it actually has CN¥383.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Chengdu Fusen Noble-House IndustrialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chengdu Fusen Noble-House IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Chengdu Fusen Noble-House IndustrialLtd saw its EBIT decline by 9.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 Chengdu Fusen Noble-House IndustrialLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chengdu Fusen Noble-House IndustrialLtd 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 most recent three years, Chengdu Fusen Noble-House IndustrialLtd recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Chengdu Fusen Noble-House IndustrialLtd has CN¥1.60b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥749m, being 73% of its EBIT. So is Chengdu Fusen Noble-House IndustrialLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Chengdu Fusen Noble-House IndustrialLtd you should know about.

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.