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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Fangdd Network Group Ltd. (NASDAQ:DUO) does carry debt. But the real question is whether this debt is making the company risky.
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Fangdd Network Group Carry?
You can click the graphic below for the historical numbers, but it shows that Fangdd Network Group had CN¥443.4m of debt in December 2020, down from CN¥490.0m, one year before. However, it does have CN¥852.4m in cash offsetting this, leading to net cash of CN¥409.0m.
A Look At Fangdd Network Group's Liabilities
According to the last reported balance sheet, Fangdd Network Group had liabilities of CN¥2.56b due within 12 months, and liabilities of CN¥24.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥852.4m as well as receivables valued at CN¥2.41b due within 12 months. So it actually has CN¥682.7m more liquid assets than total liabilities.
It's good to see that Fangdd Network Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Fangdd Network Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Fangdd Network Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Fangdd Network Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥2.5b. To be frank that doesn't bode well.
So How Risky Is Fangdd Network Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Fangdd Network Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥335m of cash and made a loss of CN¥220m. With only CN¥409.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Fangdd Network Group that you should be aware of before investing here.
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.
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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