Future Data Group (HKG:8229) Has A Rock Solid 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.' 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. Importantly, Future Data Group Limited (HKG:8229) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Future Data Group

What Is Future Data Group's Net Debt?

As you can see below, at the end of June 2021, Future Data Group had HK$56.4m of debt, up from HK$27.9m a year ago. Click the image for more detail. But on the other hand it also has HK$129.1m in cash, leading to a HK$72.8m net cash position.

How Healthy Is Future Data Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Future Data Group had liabilities of HK$158.4m due within 12 months and liabilities of HK$13.2m due beyond that. On the other hand, it had cash of HK$129.1m and HK$92.6m worth of receivables due within a year. So it can boast HK$50.1m more liquid assets than total liabilities.

This surplus strongly suggests that Future Data Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Future Data Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Future Data Group has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Future Data 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Future Data Group 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. Happily for any shareholders, Future Data Group actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Future Data Group has HK$72.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in HK$35m. The bottom line is that Future Data Group's use of debt is absolutely fine. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Future Data Group that you should be aware of.

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.

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.

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