Is Fujian Start GroupLtd (SHSE:600734) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Fujian Start Group Co.Ltd (SHSE:600734) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fujian Start GroupLtd

What Is Fujian Start GroupLtd's Debt?

The chart below, which you can click on for greater detail, shows that Fujian Start GroupLtd had CN¥126.8m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥177.4m in cash, so it actually has CN¥50.6m net cash.

A Look At Fujian Start GroupLtd's Liabilities

The latest balance sheet data shows that Fujian Start GroupLtd had liabilities of CN¥393.8m due within a year, and liabilities of CN¥7.84m falling due after that. Offsetting this, it had CN¥177.4m in cash and CN¥75.5m in receivables that were due within 12 months. So its liabilities total CN¥148.8m more than the combination of its cash and short-term receivables.

Since publicly traded Fujian Start GroupLtd shares are worth a total of CN¥7.34b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Fujian Start 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, Fujian Start GroupLtd turned things around in the last 12 months, delivering and EBIT of CN¥16m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fujian Start GroupLtd will need earnings to service that debt. 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. Fujian Start GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last year, Fujian Start GroupLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Fujian Start GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥50.6m. So we don't have any problem with Fujian Start GroupLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fujian Start GroupLtd has 1 warning sign we think you should be aware of.

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.