Is Fu Shou Yuan International Group (HKG:1448) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Fu Shou Yuan International Group Limited (HKG:1448) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fu Shou Yuan International Group

What Is Fu Shou Yuan International Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fu Shou Yuan International Group had CN¥49.2m of debt in June 2021, down from CN¥93.5m, one year before. However, its balance sheet shows it holds CN¥1.89b in cash, so it actually has CN¥1.84b net cash.

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

The latest balance sheet data shows that Fu Shou Yuan International Group had liabilities of CN¥862.7m due within a year, and liabilities of CN¥613.5m falling due after that. Offsetting this, it had CN¥1.89b in cash and CN¥157.7m in receivables that were due within 12 months. So it actually has CN¥570.7m more liquid assets than total liabilities.

This surplus suggests that Fu Shou Yuan International Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Fu Shou Yuan International Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Fu Shou Yuan International Group has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fu Shou Yuan International Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Fu Shou Yuan International Group has net cash of CN¥1.84b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 48% over the last year. So is Fu Shou Yuan International Group's debt a risk? It doesn't seem so to us. We'd be very excited to see if Fu Shou Yuan International Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.
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