Feiyu Technology International (HKG:1022) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Feiyu Technology International Company Ltd. (HKG:1022) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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¥92.9m in cash offsetting this, leading to net cash of CN¥412.0k.

How Healthy Is Feiyu Technology International's Balance Sheet?

The latest balance sheet data shows that Feiyu Technology International had liabilities of CN¥54.4m due within a year, and liabilities of CN¥90.2m falling due after that. On the other hand, it had cash of CN¥92.9m and CN¥33.3m worth of receivables due within a year. So its liabilities total CN¥18.4m more than the combination of its cash and short-term receivables.

Given Feiyu Technology International has a market capitalization of CN¥279.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Feiyu Technology International boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Feiyu Technology International's EBIT dived 20%, over the last year. 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 it is Feiyu Technology International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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¥412.0k. The cherry on top was that in converted 221% of that EBIT to free cash flow, bringing in CN¥33m. So we are not troubled with Feiyu Technology International's debt use. 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. Case in point: We've spotted 3 warning signs for Feiyu Technology International 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.