Is Foryou (SZSE:002906) A Risky Investment?

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.' 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. Importantly, Foryou Corporation (SZSE:002906) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Foryou

What Is Foryou's Net Debt?

As you can see below, Foryou had CN¥66.3m of debt at March 2024, down from CN¥173.6m a year prior. However, it does have CN¥1.51b in cash offsetting this, leading to net cash of CN¥1.44b.

How Strong Is Foryou's Balance Sheet?

According to the last reported balance sheet, Foryou had liabilities of CN¥3.37b due within 12 months, and liabilities of CN¥282.8m due beyond 12 months. On the other hand, it had cash of CN¥1.51b and CN¥3.83b worth of receivables due within a year. So it actually has CN¥1.67b more liquid assets than total liabilities.

This short term liquidity is a sign that Foryou could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Foryou 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 Foryou has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Foryou can strengthen its balance sheet over time. 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. While Foryou 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 last three years, Foryou recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Foryou has CN¥1.44b in net cash and a decent-looking balance sheet. And we liked the look of last year's 64% year-on-year EBIT growth. So is Foryou's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Foryou 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.