Is Farasis Energy (Gan Zhou) (SHSE:688567) Weighed On By Its Debt Load?

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.' 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. As with many other companies Farasis Energy (Gan Zhou) Co., Ltd. (SHSE:688567) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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 Farasis Energy (Gan Zhou)

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

You can click the graphic below for the historical numbers, but it shows that Farasis Energy (Gan Zhou) had CN¥3.63b of debt in September 2024, down from CN¥4.97b, one year before. But on the other hand it also has CN¥7.39b in cash, leading to a CN¥3.76b net cash position.

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

According to the last reported balance sheet, Farasis Energy (Gan Zhou) had liabilities of CN¥11.3b due within 12 months, and liabilities of CN¥3.71b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.39b as well as receivables valued at CN¥3.03b due within 12 months. So it has liabilities totalling CN¥4.63b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Farasis Energy (Gan Zhou) is worth CN¥14.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

In the last year Farasis Energy (Gan Zhou)'s revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

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 the fact is that over the last twelve months Farasis Energy (Gan Zhou) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥951m of cash and made a loss of CN¥608m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.76b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 example, we've discovered 1 warning sign for Farasis Energy (Gan Zhou) that you should be aware of before investing here.

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.