Is Foryou (SZSE:002906) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Foryou Corporation (SZSE:002906) 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Foryou

What Is Foryou's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Foryou had CN¥62.7m of debt in September 2024, down from CN¥186.4m, one year before. However, its balance sheet shows it holds CN¥1.35b in cash, so it actually has CN¥1.29b net cash.

A Look At Foryou's Liabilities

According to the last reported balance sheet, Foryou had liabilities of CN¥4.50b due within 12 months, and liabilities of CN¥407.4m due beyond 12 months. Offsetting this, it had CN¥1.35b in cash and CN¥4.67b in receivables that were due within 12 months. So it actually has CN¥1.11b more liquid assets than total liabilities.

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

On top of that, Foryou grew its EBIT by 89% 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 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Foryou has net cash of CN¥1.29b, as well as more liquid assets than liabilities. And we liked the look of last year's 89% year-on-year EBIT growth. So we don't have any problem with Foryou's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Foryou is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.