Is Farasis Energy (Gan Zhou) (SHSE:688567) Using Debt In A Risky Way?

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 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. As with many other companies Farasis Energy (Gan Zhou) Co., Ltd. (SHSE:688567) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Farasis Energy (Gan Zhou)

What Is Farasis Energy (Gan Zhou)'s Debt?

As you can see below, Farasis Energy (Gan Zhou) had CN¥4.21b of debt at March 2024, down from CN¥4.81b a year prior. However, it does have CN¥9.74b in cash offsetting this, leading to net cash of CN¥5.53b.

How Healthy Is Farasis Energy (Gan Zhou)'s Balance Sheet?

The latest balance sheet data shows that Farasis Energy (Gan Zhou) had liabilities of CN¥14.7b due within a year, and liabilities of CN¥4.20b falling due after that. Offsetting this, it had CN¥9.74b in cash and CN¥4.40b in receivables that were due within 12 months. So its liabilities total CN¥4.79b more than the combination of its cash and short-term receivables.

Farasis Energy (Gan Zhou) has a market capitalization of CN¥13.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Farasis Energy (Gan Zhou) boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Farasis Energy (Gan Zhou) 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.

Over 12 months, Farasis Energy (Gan Zhou) reported revenue of CN¥16b, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Farasis Energy (Gan Zhou)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Farasis Energy (Gan Zhou) had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.0b and booked a CN¥1.7b accounting loss. But the saving grace is the CN¥5.53b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Farasis Energy (Gan Zhou)'s profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.