Is Chengdu Fusen Noble-House IndustrialLtd (SZSE:002818) A Risky Investment?

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 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 Chengdu Fusen Noble-House Industrial Co.,Ltd. (SZSE:002818) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chengdu Fusen Noble-House IndustrialLtd

How Much Debt Does Chengdu Fusen Noble-House IndustrialLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Chengdu Fusen Noble-House IndustrialLtd had debt of CN¥14.0m, up from CN¥10.0m in one year. However, its balance sheet shows it holds CN¥1.62b in cash, so it actually has CN¥1.60b net cash.

A Look At Chengdu Fusen Noble-House IndustrialLtd's Liabilities

We can see from the most recent balance sheet that Chengdu Fusen Noble-House IndustrialLtd had liabilities of CN¥1.34b falling due within a year, and liabilities of CN¥16.3m due beyond that. On the other hand, it had cash of CN¥1.62b and CN¥121.2m worth of receivables due within a year. So it actually has CN¥383.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Chengdu Fusen Noble-House IndustrialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chengdu Fusen Noble-House IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Chengdu Fusen Noble-House IndustrialLtd saw its EBIT drop by 9.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Chengdu Fusen Noble-House IndustrialLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chengdu Fusen Noble-House IndustrialLtd 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 most recent three years, Chengdu Fusen Noble-House IndustrialLtd recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chengdu Fusen Noble-House IndustrialLtd has CN¥1.60b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in CN¥749m. So is Chengdu Fusen Noble-House IndustrialLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Chengdu Fusen Noble-House IndustrialLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.