Is Feiyang International Holdings Group (HKG:1901) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Feiyang International Holdings Group Limited (HKG:1901) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Feiyang International Holdings Group

What Is Feiyang International Holdings Group's Debt?

As you can see below, Feiyang International Holdings Group had CN¥187.8m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥93.1m in cash leading to net debt of about CN¥94.7m.

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

The latest balance sheet data shows that Feiyang International Holdings Group had liabilities of CN¥279.5m due within a year, and liabilities of CN¥18.0m falling due after that. Offsetting this, it had CN¥93.1m in cash and CN¥31.9m in receivables that were due within 12 months. So its liabilities total CN¥172.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Feiyang International Holdings Group has a market capitalization of CN¥356.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Feiyang International Holdings Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Feiyang International Holdings Group had a loss before interest and tax, and actually shrunk its revenue by 79%, to CN¥143m. That makes us nervous, to say the least.

Caveat Emptor

While Feiyang International Holdings Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥17m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥86m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Feiyang International Holdings Group (2 make us uncomfortable!) that you should be aware of before investing here.

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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