We Think Fujian Expressway DevelopmentLtd (SHSE:600033) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Fujian Expressway Development Co.,Ltd (SHSE:600033) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fujian Expressway DevelopmentLtd

What Is Fujian Expressway DevelopmentLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Fujian Expressway DevelopmentLtd had CN¥1.04b in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥1.46b in cash, leading to a CN¥421.3m net cash position.

How Healthy Is Fujian Expressway DevelopmentLtd's Balance Sheet?

We can see from the most recent balance sheet that Fujian Expressway DevelopmentLtd had liabilities of CN¥1.04b falling due within a year, and liabilities of CN¥2.08b due beyond that. On the other hand, it had cash of CN¥1.46b and CN¥989.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥665.2m.

Since publicly traded Fujian Expressway DevelopmentLtd shares are worth a total of CN¥9.96b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Fujian Expressway DevelopmentLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Fujian Expressway DevelopmentLtd grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is Fujian Expressway DevelopmentLtd'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 Fujian Expressway DevelopmentLtd 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 three years, Fujian Expressway DevelopmentLtd generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Fujian Expressway DevelopmentLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥421.3m. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in CN¥1.5b. So is Fujian Expressway DevelopmentLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Fujian Expressway DevelopmentLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.