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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Fu Shou Yuan International Group Limited (HKG:1448) makes use of debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Fu Shou Yuan International Group
What Is Fu Shou Yuan International Group's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Fu Shou Yuan International Group had debt of CN¥168.5m, up from CN¥156.7m in one year. However, it does have CN¥2.16b in cash offsetting this, leading to net cash of CN¥1.99b.
How Strong Is Fu Shou Yuan International Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Fu Shou Yuan International Group had liabilities of CN¥692.3m due within 12 months and liabilities of CN¥548.3m due beyond that. Offsetting these obligations, it had cash of CN¥2.16b as well as receivables valued at CN¥41.7m due within 12 months. So it actually has CN¥964.3m more liquid assets than total liabilities.
This surplus suggests that Fu Shou Yuan International Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fu Shou Yuan International Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Another good sign is that Fu Shou Yuan International Group has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fu Shou Yuan International Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.