Health Check: How Prudently Does Fosun International (HKG:656) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Fosun International Limited (HKG:656) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fosun International

What Is Fosun International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Fosun International had CN¥275.3b of debt, an increase on CN¥261.7b, over one year. However, it does have CN¥186.8b in cash offsetting this, leading to net debt of about CN¥88.6b.

How Strong Is Fosun International's Balance Sheet?

According to the last reported balance sheet, Fosun International had liabilities of CN¥375.4b due within 12 months, and liabilities of CN¥275.8b due beyond 12 months. On the other hand, it had cash of CN¥186.8b and CN¥66.0b worth of receivables due within a year. So its liabilities total CN¥398.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥44.8b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Fosun International would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fosun International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Fosun International wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥174b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Fosun International still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥740m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated CN¥3.0b of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. We've identified 3 warning signs with Fosun International (at least 1 which shouldn't be ignored) , 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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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.