Is Fosun International (HKG:656) Using Debt Sensibly?

Warren Buffett famously said, '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. We note that Fosun International Limited (HKG:656) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 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 Fosun International

What Is Fosun International's Debt?

The image below, which you can click on for greater detail, shows that Fosun International had debt of CN¥228.7b at the end of December 2022, a reduction from CN¥243.4b over a year. However, because it has a cash reserve of CN¥157.8b, its net debt is less, at about CN¥70.9b.

How Strong Is Fosun International's Balance Sheet?

According to the last reported balance sheet, Fosun International had liabilities of CN¥372.4b due within 12 months, and liabilities of CN¥251.1b due beyond 12 months. Offsetting these obligations, it had cash of CN¥157.8b as well as receivables valued at CN¥62.5b due within 12 months. So its liabilities total CN¥403.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥39.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Fosun International would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fosun International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Fosun International wasn't profitable at an EBIT level, but managed to grow its revenue by 8.7%, to CN¥175b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Fosun International had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥6.2b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥9.3b in the last year. So is this a high risk stock? We think so, and we'd avoid 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. Case in point: We've spotted 2 warning signs for Fosun International 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.