Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Flower KingEco-Engineering Inc. (SHSE:603007) does carry debt. But the real question is whether this debt is making the company risky.
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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Flower KingEco-Engineering's Net Debt?
The image below, which you can click on for greater detail, shows that Flower KingEco-Engineering had debt of CN¥630.9m at the end of September 2024, a reduction from CN¥906.0m over a year. On the flip side, it has CN¥13.1m in cash leading to net debt of about CN¥617.7m.
How Healthy Is Flower KingEco-Engineering's Balance Sheet?
According to the last reported balance sheet, Flower KingEco-Engineering had liabilities of CN¥1.89b due within 12 months, and liabilities of CN¥52.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥13.1m as well as receivables valued at CN¥1.00b due within 12 months. So it has liabilities totalling CN¥920.7m more than its cash and near-term receivables, combined.
Since publicly traded Flower KingEco-Engineering shares are worth a total of CN¥5.39b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Flower KingEco-Engineering's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Flower KingEco-Engineering had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥115m. To be frank that doesn't bode well.
Caveat Emptor
While Flower KingEco-Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥159m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥15m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. For instance, we've identified 3 warning signs for Flower KingEco-Engineering (2 can't be ignored) you should be aware of.
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.
