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. We can see that Fuyao Glass Industry Group Co., Ltd. (SHSE:600660) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

How Much Debt Does Fuyao Glass Industry Group Carry?

As you can see below, Fuyao Glass Industry Group had CN¥16.5b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥19.8b in cash, leading to a CN¥3.28b net cash position.

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

The latest balance sheet data shows that Fuyao Glass Industry Group had liabilities of CN¥17.8b due within a year, and liabilities of CN¥10.1b falling due after that. Offsetting this, it had CN¥19.8b in cash and CN¥9.74b in receivables that were due within 12 months. So it can boast CN¥1.56b more liquid assets than total liabilities.

Having regard to Fuyao Glass Industry Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥148.9b 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 49% 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 ultimately the future profitability of the business will decide if Fuyao Glass Industry Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fuyao Glass Industry Group 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, Fuyao Glass Industry Group recorded free cash flow worth 51% 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 we empathize with investors who find debt concerning, you should keep in mind that Fuyao Glass Industry Group has net cash of CN¥3.28b, as well as more liquid assets than liabilities. And we liked the look of last year's 49% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fuyao Glass Industry Group has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.