Is Fortunet e-Commerce Group (HKG:1039) A Risky Investment?

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. 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. We can see that Fortunet e-Commerce Group Limited (HKG:1039) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Fortunet e-Commerce Group

What Is Fortunet e-Commerce Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Fortunet e-Commerce Group had CN¥126.5m of debt, an increase on CN¥66.1m, over one year. But on the other hand it also has CN¥198.9m in cash, leading to a CN¥72.4m net cash position.

A Look At Fortunet e-Commerce Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Fortunet e-Commerce Group had liabilities of CN¥162.9m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CN¥198.9m as well as receivables valued at CN¥116.7m due within 12 months. So it can boast CN¥152.7m more liquid assets than total liabilities.

This excess liquidity suggests that Fortunet e-Commerce Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Fortunet e-Commerce Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Fortunet e-Commerce Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Fortunet e-Commerce Group reported revenue of CN¥82m, which is a gain of 63%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Fortunet e-Commerce Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Fortunet e-Commerce Group had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CN¥207m and booked a CN¥59m accounting loss. Given it only has net cash of CN¥72.4m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Fortunet e-Commerce Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 Fortunet e-Commerce Group (1 shouldn't be ignored) 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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