Is FS Development Investment Holdings (SZSE:300071) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, FS Development Investment Holdings (SZSE:300071) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for FS Development Investment Holdings

What Is FS Development Investment Holdings's Debt?

As you can see below, at the end of September 2024, FS Development Investment Holdings had CN¥111.7m of debt, up from CN¥18.0m a year ago. Click the image for more detail. However, it also had CN¥17.7m in cash, and so its net debt is CN¥94.0m.

How Strong Is FS Development Investment Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FS Development Investment Holdings had liabilities of CN¥925.0m due within 12 months and liabilities of CN¥216.8m due beyond that. Offsetting this, it had CN¥17.7m in cash and CN¥1.04b in receivables that were due within 12 months. So its liabilities total CN¥86.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that FS Development Investment Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.84b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, FS Development Investment Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is FS Development Investment Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year FS Development Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, FS Development Investment Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥56m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥125m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for FS Development Investment Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.