Is Fuyao Glass Industry Group (SHSE:600660) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Fuyao Glass Industry Group Co., Ltd. (SHSE:600660) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fuyao Glass Industry Group

How Much Debt Does Fuyao Glass Industry Group Carry?

The chart below, which you can click on for greater detail, shows that Fuyao Glass Industry Group had CN¥16.5b in debt in September 2024; about the same as the year before. But it also has CN¥19.8b in cash to offset that, meaning it has CN¥3.28b net cash.

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 these obligations, it had cash of CN¥19.8b as well as receivables valued at CN¥9.74b due within 12 months. So it actually has CN¥1.56b 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 while it's hard to imagine that the CN¥155.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Fuyao Glass Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fuyao Glass Industry Group's ability to maintain a healthy balance sheet going forward. 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. 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 free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fuyao Glass Industry Group has CN¥3.28b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 49% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Fuyao Glass Industry Group is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.