Here's Why Fujian Yuanli Active CarbonLtd (SZSE:300174) Can Manage Its Debt Responsibly

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. Importantly, Fujian Yuanli Active Carbon Co.,Ltd. (SZSE:300174) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Fujian Yuanli Active CarbonLtd

What Is Fujian Yuanli Active CarbonLtd's Debt?

As you can see below, at the end of March 2024, Fujian Yuanli Active CarbonLtd had CN¥342.7m of debt, up from CN¥234.2m a year ago. Click the image for more detail. But it also has CN¥1.53b in cash to offset that, meaning it has CN¥1.19b net cash.

A Look At Fujian Yuanli Active CarbonLtd's Liabilities

We can see from the most recent balance sheet that Fujian Yuanli Active CarbonLtd had liabilities of CN¥527.4m falling due within a year, and liabilities of CN¥124.4m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥425.3m in receivables that were due within 12 months. So it can boast CN¥1.30b more liquid assets than total liabilities.

It's good to see that Fujian Yuanli Active CarbonLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Fujian Yuanli Active CarbonLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Fujian Yuanli Active CarbonLtd grew its EBIT by 2.9% 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 ultimately the future profitability of the business will decide if Fujian Yuanli Active CarbonLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fujian Yuanli Active CarbonLtd 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. Over the last three years, Fujian Yuanli Active CarbonLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Yuanli Active CarbonLtd has net cash of CN¥1.19b, as well as more liquid assets than liabilities. And it also grew its EBIT by 2.9% over the last year. So we don't have any problem with Fujian Yuanli Active CarbonLtd's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Fujian Yuanli Active CarbonLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.