Is Fuyao Glass Industry Group (SHSE:600660) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Fuyao Glass Industry Group Co., Ltd. (SHSE:600660) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fuyao Glass Industry Group

What Is Fuyao Glass Industry Group's Net Debt?

As you can see below, at the end of March 2024, Fuyao Glass Industry Group had CN¥16.0b of debt, up from CN¥15.1b a year ago. Click the image for more detail. But it also has CN¥20.6b in cash to offset that, meaning it has CN¥4.68b 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¥15.6b due within a year, and liabilities of CN¥11.2b falling due after that. On the other hand, it had cash of CN¥20.6b and CN¥9.39b worth of receivables due within a year. So it actually has CN¥3.21b more liquid assets than total liabilities.

This surplus suggests that Fuyao Glass Industry Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Fuyao Glass Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Fuyao Glass Industry Group has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fuyao Glass Industry Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Fuyao Glass Industry Group recorded free cash flow worth 54% 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 we empathize with investors who find debt concerning, you should keep in mind that Fuyao Glass Industry Group has net cash of CN¥4.68b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Fuyao Glass Industry Group is showing 1 warning sign in our investment analysis , you should know about...

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.

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