Feiyang International Holdings Group (HKG:1901) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Feiyang International Holdings Group Limited (HKG:1901) does carry debt. But the real question is whether this debt is making the company risky.

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Feiyang International Holdings Group

What Is Feiyang International Holdings Group's Debt?

The chart below, which you can click on for greater detail, shows that Feiyang International Holdings Group had CN¥194.9m in debt in December 2023; about the same as the year before. On the flip side, it has CN¥59.0m in cash leading to net debt of about CN¥135.9m.

How Strong Is Feiyang International Holdings Group's Balance Sheet?

We can see from the most recent balance sheet that Feiyang International Holdings Group had liabilities of CN¥478.8m falling due within a year, and liabilities of CN¥7.96m due beyond that. Offsetting these obligations, it had cash of CN¥59.0m as well as receivables valued at CN¥260.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥167.1m.

When you consider that this deficiency exceeds the company's CN¥156.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Feiyang International Holdings Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Feiyang International Holdings Group reported revenue of CN¥534m, which is a gain of 599%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Feiyang International Holdings Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥36m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥9.6m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Feiyang International Holdings Group you should be aware of, and 1 of them is concerning.

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.