We Think Fuchun Technology (SZSE:300299) Has A Fair Chunk Of Debt

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.' 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. Importantly, Fuchun Technology Co., Ltd. (SZSE:300299) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Fuchun Technology

What Is Fuchun Technology's Debt?

The image below, which you can click on for greater detail, shows that Fuchun Technology had debt of CN¥224.8m at the end of September 2024, a reduction from CN¥238.6m over a year. However, it does have CN¥106.5m in cash offsetting this, leading to net debt of about CN¥118.3m.

How Healthy Is Fuchun Technology's Balance Sheet?

We can see from the most recent balance sheet that Fuchun Technology had liabilities of CN¥451.2m falling due within a year, and liabilities of CN¥45.6m due beyond that. Offsetting this, it had CN¥106.5m in cash and CN¥221.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥169.1m more than its cash and near-term receivables, combined.

Since publicly traded Fuchun Technology shares are worth a total of CN¥4.64b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fuchun Technology will need earnings to service that debt. 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 Fuchun Technology had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥277m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Fuchun Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥43m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥35m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Fuchun Technology you should know about.

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.