Fu Shou Yuan International Group (HKG:1448) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Fu Shou Yuan International Group Limited (HKG:1448) 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the HK Consumer Services industry.

What Is Fu Shou Yuan International Group's Debt?

As you can see below, Fu Shou Yuan International Group had CN¥25.8m of debt at June 2022, down from CN¥49.2m a year prior. But on the other hand it also has CN¥1.97b in cash, leading to a CN¥1.95b net cash position.

How Healthy Is Fu Shou Yuan International Group's Balance Sheet?

We can see from the most recent balance sheet that Fu Shou Yuan International Group had liabilities of CN¥942.7m falling due within a year, and liabilities of CN¥673.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.97b as well as receivables valued at CN¥214.3m due within 12 months. So it can boast CN¥570.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Fu Shou Yuan International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fu Shou Yuan International Group has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Fu Shou Yuan International Group has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fu Shou Yuan International Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Fu Shou Yuan International Group 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, Fu Shou Yuan International Group produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fu Shou Yuan International Group has CN¥1.95b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in CN¥650m. So we are not troubled with Fu Shou Yuan International Group's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fu Shou Yuan International Group's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.