These 4 Measures Indicate That Foryou (SZSE:002906) Is Using Debt Reasonably Well

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. We note that Foryou Corporation (SZSE:002906) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Foryou

How Much Debt Does Foryou Carry?

You can click the graphic below for the historical numbers, but it shows that Foryou had CN¥75.6m of debt in June 2024, down from CN¥217.3m, one year before. However, it does have CN¥1.31b in cash offsetting this, leading to net cash of CN¥1.23b.

How Strong Is Foryou's Balance Sheet?

According to the last reported balance sheet, Foryou had liabilities of CN¥3.65b due within 12 months, and liabilities of CN¥285.8m due beyond 12 months. Offsetting this, it had CN¥1.31b in cash and CN¥3.99b in receivables that were due within 12 months. So it can boast CN¥1.37b 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. Simply put, the fact that Foryou has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Foryou grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Foryou 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. In the last three years, Foryou basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Foryou has net cash of CN¥1.23b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 83% over the last year. So we don't think Foryou's use of debt is risky. 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. Be aware that Foryou is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.