Founder Technology GroupLtd (SHSE:600601) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Founder Technology Group Co.,Ltd. (SHSE:600601) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Founder Technology GroupLtd

What Is Founder Technology GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Founder Technology GroupLtd had debt of CN¥296.8m at the end of March 2024, a reduction from CN¥354.4m over a year. However, its balance sheet shows it holds CN¥865.1m in cash, so it actually has CN¥568.3m net cash.

How Strong Is Founder Technology GroupLtd's Balance Sheet?

According to the last reported balance sheet, Founder Technology GroupLtd had liabilities of CN¥1.34b due within 12 months, and liabilities of CN¥420.6m due beyond 12 months. On the other hand, it had cash of CN¥865.1m and CN¥1.16b worth of receivables due within a year. So it can boast CN¥270.2m more liquid assets than total liabilities.

This surplus suggests that Founder Technology GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Founder Technology GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

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¥214m. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last year, Founder Technology GroupLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Founder Technology GroupLtd has CN¥568.3m in net cash and a decent-looking balance sheet. So we are not troubled with Founder Technology GroupLtd's debt use. 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 instance, we've identified 1 warning sign for Founder Technology GroupLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.