Here's Why Feiyu Technology International (HKG:1022) Can Afford Some Debt

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.' 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 can see that Feiyu Technology International Company Ltd. (HKG:1022) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Feiyu Technology International

What Is Feiyu Technology International's Net Debt?

As you can see below, at the end of June 2020, Feiyu Technology International had CN¥128.3m of debt, up from CN¥91.3m a year ago. Click the image for more detail. On the flip side, it has CN¥120.8m in cash leading to net debt of about CN¥7.59m.

How Healthy Is Feiyu Technology International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Feiyu Technology International had liabilities of CN¥135.2m due within 12 months and liabilities of CN¥62.8m due beyond that. On the other hand, it had cash of CN¥120.8m and CN¥28.3m worth of receivables due within a year. So it has liabilities totalling CN¥49.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Feiyu Technology International has a market capitalization of CN¥222.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

In the last year Feiyu Technology International wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to CN¥118m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Feiyu Technology International's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥76m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥69m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 (1 is potentially serious!) that you should be aware of before investing here.

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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