Is Fosun Tourism Group (HKG:1992) Using Debt Sensibly?

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.' 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. We note that Fosun Tourism Group (HKG:1992) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Fosun Tourism Group

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¥13.8b in debt in June 2021; about the same as the year before. However, because it has a cash reserve of CN¥5.47b, its net debt is less, at about CN¥8.29b.

How Healthy Is Fosun Tourism Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fosun Tourism Group had liabilities of CN¥12.8b due within 12 months and liabilities of CN¥21.6b due beyond that. Offsetting this, it had CN¥5.47b in cash and CN¥1.31b in receivables that were due within 12 months. So its liabilities total CN¥27.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥9.93b 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 definitely think shareholders need to watch this one closely. At the end of the day, Fosun Tourism Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fosun Tourism 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.

Over 12 months, Fosun Tourism Group made a loss at the EBIT level, and saw its revenue drop to CN¥5.3b, which is a fall of 58%. 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). Its EBIT loss was a whopping CN¥1.4b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CN¥1.0b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Fosun Tourism Group you should be aware of.

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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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.