FriendTimes (HKG:6820) Seems To Use Debt Rather Sparingly

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.' 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, FriendTimes Inc. (HKG:6820) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is FriendTimes's Debt?

As you can see below, FriendTimes had CN¥110.4m of debt at June 2025, down from CN¥162.9m a year prior. However, it does have CN¥786.0m in cash offsetting this, leading to net cash of CN¥675.5m.

How Strong Is FriendTimes' Balance Sheet?

We can see from the most recent balance sheet that FriendTimes had liabilities of CN¥220.1m falling due within a year, and liabilities of CN¥4.89m due beyond that. Offsetting these obligations, it had cash of CN¥786.0m as well as receivables valued at CN¥78.1m due within 12 months. So it can boast CN¥639.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that FriendTimes' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that FriendTimes has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for FriendTimes

Although FriendTimes made a loss at the EBIT level, last year, it was also good to see that it generated CN¥44m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FriendTimes's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. FriendTimes 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. Over the last year, FriendTimes actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that FriendTimes has net cash of CN¥675.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 212% of that EBIT to free cash flow, bringing in CN¥93m. So we don't think FriendTimes's use of debt 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 instance, we've identified 1 warning sign for FriendTimes that you should be aware of.

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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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.