These 4 Measures Indicate That Feiyu Technology International (HKG:1022) Is Using Debt Safely

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. Importantly, Feiyu Technology International Company Ltd. (HKG:1022) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Feiyu Technology International

What Is Feiyu Technology International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Feiyu Technology International had CN¥95.5m of debt, an increase on CN¥70.0m, over one year. However, its balance sheet shows it holds CN¥161.2m in cash, so it actually has CN¥65.7m net cash.

A Look At Feiyu Technology International's Liabilities

The latest balance sheet data shows that Feiyu Technology International had liabilities of CN¥80.8m due within a year, and liabilities of CN¥95.1m falling due after that. On the other hand, it had cash of CN¥161.2m and CN¥47.7m worth of receivables due within a year. So it can boast CN¥32.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Feiyu Technology International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Feiyu Technology International boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Feiyu Technology International made a loss at the EBIT level, last year, it was also good to see that it generated CN¥38m in EBIT over the last twelve months. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last year, Feiyu Technology International generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Feiyu Technology International has net cash of CN¥65.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥33m, being 87% of its EBIT. So we don't think Feiyu Technology International's use of debt is risky. 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. For example, we've discovered 1 warning sign for Feiyu Technology International that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.