Feiyu Technology International (HKG:1022) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Feiyu Technology International Company Ltd. (HKG:1022) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Feiyu Technology International

How Much Debt Does Feiyu Technology International Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Feiyu Technology International had CN¥92.5m of debt, an increase on CN¥68.5m, over one year. However, it does have CN¥93.7m in cash offsetting this, leading to net cash of CN¥1.18m.

How Strong Is Feiyu Technology International's Balance Sheet?

We can see from the most recent balance sheet that Feiyu Technology International had liabilities of CN¥54.4m falling due within a year, and liabilities of CN¥90.2m due beyond that. Offsetting these obligations, it had cash of CN¥93.7m as well as receivables valued at CN¥44.3m due within 12 months. So its liabilities total CN¥6.65m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Feiyu Technology International's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥341.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Feiyu Technology International boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Feiyu Technology International has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Feiyu Technology International 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Feiyu Technology International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Feiyu Technology International actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Feiyu Technology International's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.18m. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in CN¥10m. So we don't have any problem with Feiyu Technology International's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Feiyu Technology International is showing 4 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.