Health Check: How Prudently Does Feiyu Technology International (HKG:1022) Use Debt?

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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Feiyu Technology International

What Is Feiyu Technology International's Debt?

You can click the graphic below for the historical numbers, but it shows that Feiyu Technology International had CN¥63.8m of debt in December 2020, down from CN¥116.7m, one year before. But it also has CN¥145.7m in cash to offset that, meaning it has CN¥81.9m net cash.

A Look At Feiyu Technology International's Liabilities

We can see from the most recent balance sheet that Feiyu Technology International had liabilities of CN¥84.2m falling due within a year, and liabilities of CN¥60.7m due beyond that. Offsetting this, it had CN¥145.7m in cash and CN¥41.4m in receivables that were due within 12 months. So it actually has CN¥42.2m more liquid assets than total liabilities.

This surplus suggests that Feiyu Technology International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Feiyu Technology International boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Feiyu Technology International reported revenue of CN¥117m, which is a gain of 3.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Feiyu Technology International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Feiyu Technology International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥64m and booked a CN¥21m accounting loss. But at least it has CN¥81.9m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Feiyu Technology International that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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