Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Fuxing China Group Limited (SGX:AWK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fuxing China Group

What Is Fuxing China Group's Debt?

The image below, which you can click on for greater detail, shows that Fuxing China Group had debt of CN¥231.0m at the end of June 2024, a reduction from CN¥261.9m over a year. However, it also had CN¥158.7m in cash, and so its net debt is CN¥72.3m.

How Healthy Is Fuxing China Group's Balance Sheet?

According to the last reported balance sheet, Fuxing China Group had liabilities of CN¥327.8m due within 12 months, and liabilities of CN¥19.9m due beyond 12 months. On the other hand, it had cash of CN¥158.7m and CN¥226.5m worth of receivables due within a year. So it can boast CN¥37.6m more liquid assets than total liabilities.

This luscious liquidity implies that Fuxing China 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fuxing China 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.

In the last year Fuxing China Group had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to CN¥724m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Fuxing China Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥3.4m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Be aware that Fuxing China Group is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.

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