Does Fabchem China (SGX:BFT) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Fabchem China Limited (SGX:BFT) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Fabchem China

How Much Debt Does Fabchem China Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Fabchem China had debt of CN¥79.5m, up from CN¥60.2m in one year. However, its balance sheet shows it holds CN¥80.1m in cash, so it actually has CN¥612.0k net cash.

How Strong Is Fabchem China's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fabchem China had liabilities of CN¥130.4m due within 12 months and liabilities of CN¥24.6m due beyond that. Offsetting this, it had CN¥80.1m in cash and CN¥15.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥59.5m.

This deficit casts a shadow over the CN¥39.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Fabchem China would probably need a major re-capitalization if its creditors were to demand repayment. Fabchem China boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fabchem China 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.

Over 12 months, Fabchem China reported revenue of CN¥132m, which is a gain of 5.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Fabchem China?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Fabchem China had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥4.2m and booked a CN¥33m accounting loss. But the saving grace is the CN¥612.0k on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Fabchem China is showing 2 warning signs in our investment analysis , you should know about...

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.

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This article by Simply Wall St is general in nature. 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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