Fujian Longxi Bearing (Group) (SHSE:600592) Has A Pretty Healthy Balance Sheet

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. Importantly, Fujian Longxi Bearing (Group) Co., Ltd (SHSE:600592) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fujian Longxi Bearing (Group)

What Is Fujian Longxi Bearing (Group)'s Net Debt?

As you can see below, Fujian Longxi Bearing (Group) had CN¥220.0m of debt at September 2024, down from CN¥431.0m a year prior. However, it does have CN¥866.4m in cash offsetting this, leading to net cash of CN¥646.5m.

How Healthy Is Fujian Longxi Bearing (Group)'s Balance Sheet?

According to the last reported balance sheet, Fujian Longxi Bearing (Group) had liabilities of CN¥472.3m due within 12 months, and liabilities of CN¥596.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥866.4m as well as receivables valued at CN¥925.6m due within 12 months. So it actually has CN¥723.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Fujian Longxi Bearing (Group) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fujian Longxi Bearing (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Fujian Longxi Bearing (Group) grew its EBIT by 2.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fujian Longxi Bearing (Group) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fujian Longxi Bearing (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. Considering the last three years, Fujian Longxi Bearing (Group) actually recorded a cash outflow, overall. 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 we empathize with investors who find debt concerning, you should keep in mind that Fujian Longxi Bearing (Group) has net cash of CN¥646.5m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.1% in the last twelve months. So we don't have any problem with Fujian Longxi Bearing (Group)'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. For instance, we've identified 2 warning signs for Fujian Longxi Bearing (Group) that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.