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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Futong Technology Development Holdings Limited (HKG:465) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Futong Technology Development Holdings
How Much Debt Does Futong Technology Development Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Futong Technology Development Holdings had CN¥10.5m of debt in June 2019, down from CN¥141.0m, one year before. However, it does have CN¥282.9m in cash offsetting this, leading to net cash of CN¥272.4m.
How Healthy Is Futong Technology Development Holdings's Balance Sheet?
We can see from the most recent balance sheet that Futong Technology Development Holdings had liabilities of CN¥234.8m falling due within a year, and liabilities of CN¥419.0k due beyond that. On the other hand, it had cash of CN¥282.9m and CN¥333.2m worth of receivables due within a year. So it can boast CN¥380.9m more liquid assets than total liabilities.
This excess liquidity is a great indication that Futong Technology Development Holdings's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Futong Technology Development Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Futong Technology Development Holdings grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Futong Technology Development Holdings 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.