These 4 Measures Indicate That Xiamen Faratronic (SHSE:600563) Is Using Debt Reasonably Well

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. As with many other companies Xiamen Faratronic Co., Ltd. (SHSE:600563) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Xiamen Faratronic

What Is Xiamen Faratronic's Debt?

You can click the graphic below for the historical numbers, but it shows that Xiamen Faratronic had CN¥27.3m of debt in September 2024, down from CN¥40.6m, one year before. But on the other hand it also has CN¥1.97b in cash, leading to a CN¥1.95b net cash position.

A Look At Xiamen Faratronic's Liabilities

According to the last reported balance sheet, Xiamen Faratronic had liabilities of CN¥1.97b due within 12 months, and liabilities of CN¥214.6m due beyond 12 months. Offsetting this, it had CN¥1.97b in cash and CN¥2.12b in receivables that were due within 12 months. So it can boast CN¥1.90b more liquid assets than total liabilities.

This short term liquidity is a sign that Xiamen Faratronic could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xiamen Faratronic has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Xiamen Faratronic has increased its EBIT by 3.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Xiamen Faratronic 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Xiamen Faratronic 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, Xiamen Faratronic recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xiamen Faratronic has CN¥1.95b in net cash and a decent-looking balance sheet. So we don't think Xiamen Faratronic's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Xiamen Faratronic's earnings per share history for free.

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.