Is Fujian Longxi Bearing (Group) (SHSE:600592) A Risky Investment?

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.' 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 Fujian Longxi Bearing (Group) Co., Ltd (SHSE:600592) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Fujian Longxi Bearing (Group)

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

As you can see below, Fujian Longxi Bearing (Group) had CN¥431.0m of debt at September 2023, down from CN¥894.5m a year prior. But it also has CN¥1.12b in cash to offset that, meaning it has CN¥687.9m net cash.

A Look At Fujian Longxi Bearing (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Fujian Longxi Bearing (Group) had liabilities of CN¥663.7m due within 12 months and liabilities of CN¥636.3m due beyond that. Offsetting this, it had CN¥1.12b in cash and CN¥790.7m in receivables that were due within 12 months. So it can boast CN¥609.6m more liquid assets than total liabilities.

This surplus suggests that Fujian Longxi Bearing (Group) is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Fujian Longxi Bearing (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Fujian Longxi Bearing (Group) grew its EBIT by 4.3% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fujian Longxi Bearing (Group) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fujian Longxi Bearing (Group) 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, Fujian Longxi Bearing (Group)'s free cash flow amounted to 20% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fujian Longxi Bearing (Group) has CN¥687.9m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 4.3% over the last year. So we are not troubled with Fujian Longxi Bearing (Group)'s debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fujian Longxi Bearing (Group)'s earnings per share history for free.

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.