Here's Why Fullshare Holdings (HKG:607) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Fullshare Holdings Limited (HKG:607) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fullshare Holdings

What Is Fullshare Holdings's Debt?

The image below, which you can click on for greater detail, shows that Fullshare Holdings had debt of CN¥7.22b at the end of December 2020, a reduction from CN¥10.3b over a year. However, it does have CN¥7.31b in cash offsetting this, leading to net cash of CN¥91.6m.

How Strong Is Fullshare Holdings' Balance Sheet?

We can see from the most recent balance sheet that Fullshare Holdings had liabilities of CN¥18.4b falling due within a year, and liabilities of CN¥4.34b due beyond that. Offsetting these obligations, it had cash of CN¥7.31b as well as receivables valued at CN¥6.83b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.63b.

The deficiency here weighs heavily on the CN¥2.77b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Fullshare Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Fullshare Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, Fullshare Holdings's EBIT launched higher than Elon Musk, gaining a whopping 110% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fullshare Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fullshare Holdings 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. During the last three years, Fullshare Holdings produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Fullshare Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥91.6m. And it impressed us with its EBIT growth of 110% over the last year. So although we see some areas for improvement, we're not too worried about Fullshare Holdings's balance sheet. 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. We've identified 1 warning sign with Fullshare Holdings , and understanding them should be part of your investment process.

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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