Does Founder Technology GroupLtd (SHSE:600601) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Founder Technology Group Co.,Ltd. (SHSE:600601) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Founder Technology GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Founder Technology GroupLtd had debt of CN¥621.0m, up from CN¥283.8m in one year. However, its balance sheet shows it holds CN¥1.21b in cash, so it actually has CN¥593.3m net cash.

A Look At Founder Technology GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Founder Technology GroupLtd had liabilities of CN¥1.59b due within 12 months and liabilities of CN¥720.5m due beyond that. Offsetting this, it had CN¥1.21b in cash and CN¥945.0m in receivables that were due within 12 months. So its liabilities total CN¥150.5m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Founder Technology GroupLtd's 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¥21.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Founder Technology GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Founder Technology GroupLtd

It was also good to see that despite losing money on the EBIT line last year, Founder Technology GroupLtd turned things around in the last 12 months, delivering and EBIT of CN¥234m. There's no doubt that we learn most about debt from the balance sheet. But it is Founder Technology GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Founder Technology GroupLtd 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 last year, Founder Technology GroupLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Founder Technology GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥593.3m. So we are not troubled with Founder Technology GroupLtd's debt use. 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 2 warning signs for Founder Technology GroupLtd you should know about.

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.