Is Fosun Tourism Group (HKG:1992) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Fosun Tourism Group (HKG:1992) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Fosun Tourism Group

How Much Debt Does Fosun Tourism Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Fosun Tourism Group had CN¥13.4b of debt, an increase on CN¥6.84b, over one year. However, because it has a cash reserve of CN¥4.90b, its net debt is less, at about CN¥8.45b.

How Strong Is Fosun Tourism Group's Balance Sheet?

We can see from the most recent balance sheet that Fosun Tourism Group had liabilities of CN¥10.4b falling due within a year, and liabilities of CN¥23.0b due beyond that. Offsetting these obligations, it had cash of CN¥4.90b as well as receivables valued at CN¥2.32b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥26.1b.

The deficiency here weighs heavily on the CN¥11.8b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Fosun Tourism Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Fosun Tourism Group made a loss at the EBIT level, and saw its revenue drop to CN¥7.1b, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Fosun Tourism Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥495m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥1.9b over the last twelve months. That means it's on the risky side of things. 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 - Fosun Tourism Group has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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