Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Fosun Tourism Group (HKG:1992) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.
What Is Fosun Tourism Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Fosun Tourism Group had CN¥13.3b in debt in December 2021; about the same as the year before. However, it also had CN¥4.56b in cash, and so its net debt is CN¥8.70b.
A Look At Fosun Tourism Group's Liabilities
The latest balance sheet data shows that Fosun Tourism Group had liabilities of CN¥13.3b due within a year, and liabilities of CN¥21.0b falling due after that. Offsetting this, it had CN¥4.56b in cash and CN¥1.86b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥27.9b.
This deficit casts a shadow over the CN¥11.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Fosun Tourism Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fosun Tourism 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.
In the last year Fosun Tourism Group wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to CN¥9.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.
While we can certainly appreciate Fosun Tourism Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥379m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥2.7b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Fosun Tourism Group you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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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