These 4 Measures Indicate That Fujian Star-net Communication (SZSE:002396) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Fujian Star-net Communication Co., LTD. (SZSE:002396) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Fujian Star-net Communication

What Is Fujian Star-net Communication's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Fujian Star-net Communication had debt of CN¥2.01b, up from CN¥477.2m in one year. But on the other hand it also has CN¥3.25b in cash, leading to a CN¥1.25b net cash position.

How Healthy Is Fujian Star-net Communication's Balance Sheet?

The latest balance sheet data shows that Fujian Star-net Communication had liabilities of CN¥6.47b due within a year, and liabilities of CN¥289.6m falling due after that. On the other hand, it had cash of CN¥3.25b and CN¥3.49b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Fujian Star-net Communication's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥8.42b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Fujian Star-net Communication boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Fujian Star-net Communication's load is not too heavy, because its EBIT was down 30% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fujian Star-net Communication can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fujian Star-net Communication 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. Looking at the most recent three years, Fujian Star-net Communication recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Fujian Star-net Communication's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.25b. So we are not troubled with Fujian Star-net Communication's debt use. 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, we've discovered 2 warning signs for Fujian Star-net Communication that you should be aware of before investing here.

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.