We Think Founder Technology GroupLtd (SHSE:600601) Can Stay On Top Of Its Debt

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. We note that Founder Technology Group Co.,Ltd. (SHSE:600601) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Founder Technology GroupLtd

How Much Debt Does Founder Technology GroupLtd Carry?

As you can see below, at the end of March 2024, Founder Technology GroupLtd had CN¥390.2m of debt, up from CN¥354.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥865.1m in cash, so it actually has CN¥475.0m net cash.

How Healthy Is Founder Technology GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Founder Technology GroupLtd had liabilities of CN¥1.34b due within 12 months and liabilities of CN¥420.6m due beyond that. Offsetting this, it had CN¥865.1m in cash and CN¥1.16b in receivables that were due within 12 months. So it can boast CN¥270.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Founder Technology GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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¥203m. The balance sheet is clearly the area to focus on when you are analysing debt. 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, 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Founder Technology GroupLtd has CN¥475.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Founder Technology GroupLtd's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Founder Technology GroupLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.