Fineland Living Services Group (HKG:9978) Has A Pretty Healthy Balance Sheet

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.' 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 Fineland Living Services Group Limited (HKG:9978) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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.

Check out our latest analysis for Fineland Living Services Group

What Is Fineland Living Services Group's Net Debt?

As you can see below, at the end of June 2022, Fineland Living Services Group had CN¥40.0m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥114.2m in cash to offset that, meaning it has CN¥74.2m net cash.

A Look At Fineland Living Services Group's Liabilities

We can see from the most recent balance sheet that Fineland Living Services Group had liabilities of CN¥297.1m falling due within a year, and liabilities of CN¥23.3m due beyond that. Offsetting these obligations, it had cash of CN¥114.2m as well as receivables valued at CN¥338.7m due within 12 months. So it can boast CN¥132.5m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Fineland Living Services Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Fineland Living Services Group has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fineland Living Services Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fineland Living Services Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Fineland Living Services Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fineland Living Services Group has CN¥74.2m in net cash and a strong balance sheet. So we don't have any problem with Fineland Living Services Group's use of debt. 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. We've identified 4 warning signs with Fineland Living Services Group (at least 1 which is significant) , and understanding them should be part of your investment process.

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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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.