We Think FangDa Carbon New MaterialLtd (SHSE:600516) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that FangDa Carbon New Material Co.,Ltd (SHSE:600516) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 FangDa Carbon New MaterialLtd

What Is FangDa Carbon New MaterialLtd's Debt?

As you can see below, at the end of June 2024, FangDa Carbon New MaterialLtd had CN¥1.33b of debt, up from CN¥998.3m a year ago. Click the image for more detail. But on the other hand it also has CN¥7.10b in cash, leading to a CN¥5.78b net cash position.

How Healthy Is FangDa Carbon New MaterialLtd's Balance Sheet?

We can see from the most recent balance sheet that FangDa Carbon New MaterialLtd had liabilities of CN¥2.52b falling due within a year, and liabilities of CN¥426.8m due beyond that. Offsetting this, it had CN¥7.10b in cash and CN¥1.70b in receivables that were due within 12 months. So it actually has CN¥5.86b more liquid assets than total liabilities.

This surplus liquidity suggests that FangDa Carbon New MaterialLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, FangDa Carbon New MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that FangDa Carbon New MaterialLtd saw its EBIT decline by 4.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 FangDa Carbon New MaterialLtd can strengthen its balance sheet over time. 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 FangDa Carbon New MaterialLtd 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. In the last three years, FangDa Carbon New MaterialLtd's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that FangDa Carbon New MaterialLtd has net cash of CN¥5.78b, as well as more liquid assets than liabilities. So we don't have any problem with FangDa Carbon New MaterialLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for FangDa Carbon New MaterialLtd that you should be aware of.

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.