Fineland Living Services Group (HKG:9978) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Fineland Living Services Group Limited (HKG:9978) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fineland Living Services Group

What Is Fineland Living Services Group's Debt?

As you can see below, Fineland Living Services Group had CN¥35.0m of debt at June 2023, down from CN¥40.0m a year prior. But it also has CN¥172.3m in cash to offset that, meaning it has CN¥137.3m net cash.

How Strong Is Fineland Living Services Group's Balance Sheet?

The latest balance sheet data shows that Fineland Living Services Group had liabilities of CN¥314.8m due within a year, and liabilities of CN¥9.19m falling due after that. On the other hand, it had cash of CN¥172.3m and CN¥266.9m worth of receivables due within a year. So it can boast CN¥115.2m more liquid assets than total liabilities.

This luscious liquidity implies that Fineland Living Services Group's balance sheet is sturdy like a giant sequoia tree. 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 Fineland Living Services Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fineland Living Services Group'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.

In the last year Fineland Living Services Group had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥452m. That makes us nervous, to say the least.

So How Risky Is Fineland Living Services Group?

Although Fineland Living Services Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥52m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. Case in point: We've spotted 3 warning signs for Fineland Living Services Group you should be aware of, and 2 of them are a bit concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.