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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. 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. We note that Fu Shou Yuan International Group Limited (HKG:1448) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Fu Shou Yuan International Group
What Is Fu Shou Yuan International Group's Net 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.
A Look At Fu Shou Yuan International Group's Liabilities
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 this, it had CN¥2.16b in cash and CN¥41.7m in receivables that were 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. Succinctly put, Fu Shou Yuan International Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Fu Shou Yuan International Group grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fu Shou Yuan International Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.