Here's Why Shanghai Fudan Forward S&T (SHSE:600624) Can Afford Some 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.' 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. We can see that Shanghai Fudan Forward S&T Co., Ltd (SHSE:600624) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 Shanghai Fudan Forward S&T

What Is Shanghai Fudan Forward S&T's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Fudan Forward S&T had CN¥381.7m of debt in September 2024, down from CN¥491.1m, one year before. On the flip side, it has CN¥126.2m in cash leading to net debt of about CN¥255.5m.

How Strong Is Shanghai Fudan Forward S&T's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Fudan Forward S&T had liabilities of CN¥600.8m falling due within a year, and liabilities of CN¥155.1m due beyond that. Offsetting this, it had CN¥126.2m in cash and CN¥96.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥533.6m more than its cash and near-term receivables, combined.

Since publicly traded Shanghai Fudan Forward S&T shares are worth a total of CN¥4.80b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Fudan Forward S&T 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.

Over 12 months, Shanghai Fudan Forward S&T made a loss at the EBIT level, and saw its revenue drop to CN¥639m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Shanghai Fudan Forward S&T's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥38m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥5.7m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shanghai Fudan Forward S&T has 2 warning signs we think 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.

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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.