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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Fangdd Network Group Ltd. (NASDAQ:DUO) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
How Much Debt Does Fangdd Network Group Carry?
The image below, which you can click on for greater detail, shows that at March 2020 Fangdd Network Group had debt of CN¥488.0m, up from CN¥299.0m in one year. However, its balance sheet shows it holds CN¥838.0m in cash, so it actually has CN¥350.0m net cash.
How Healthy Is Fangdd Network Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Fangdd Network Group had liabilities of CN¥2.67b due within 12 months and liabilities of CN¥12.4m due beyond that. On the other hand, it had cash of CN¥838.0m and CN¥2.01b worth of receivables due within a year. So it can boast CN¥166.5m more liquid assets than total liabilities.
This surplus suggests that Fangdd Network Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 ultimately the future profitability of the business will decide if Fangdd Network Group can strengthen its balance sheet over time. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥3.2b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Fangdd Network Group?
Although Fangdd Network Group had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of CN¥117m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 24% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Fangdd Network Group you should be aware of, and 1 of them is significant.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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