We Think Fuyao Glass Industry Group (SHSE:600660) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fuyao Glass Industry Group

What Is Fuyao Glass Industry Group's Net Debt?

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. However, it does have CN¥19.8b in cash offsetting this, leading to net cash of CN¥3.28b.

A Look At Fuyao Glass Industry Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Fuyao Glass Industry Group had liabilities of CN¥17.8b due within 12 months and liabilities of CN¥10.1b due beyond that. On the other hand, it had cash of CN¥19.8b and CN¥9.74b worth of receivables due within a year. So it actually has 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¥143.5b 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. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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 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 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Fuyao Glass Industry Group that you should be aware of before investing here.

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.