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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Fosun International Limited (HKG:656) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fosun International

How Much Debt Does Fosun International Carry?

As you can see below, Fosun International had CN¥234.4b of debt at June 2023, down from CN¥275.3b a year prior. But on the other hand it also has CN¥272.3b in cash, leading to a CN¥37.8b net cash position.

How Strong Is Fosun International's Balance Sheet?

We can see from the most recent balance sheet that Fosun International had liabilities of CN¥384.5b falling due within a year, and liabilities of CN¥245.0b due beyond that. Offsetting these obligations, it had cash of CN¥272.3b as well as receivables valued at CN¥44.2b due within 12 months. So its liabilities total CN¥313.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥37.4b 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 definitely think shareholders need to watch this one closely. After all, Fosun International would likely require a major re-capitalisation if it had to pay its creditors today. Fosun International 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. 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.

Over 12 months, Fosun International reported revenue of CN¥185b, which is a gain of 6.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Fosun International?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Fosun International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥9.3b and booked a CN¥395m accounting loss. With only CN¥37.8b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Fosun International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.