Is Flat Glass Group (HKG:6865) taking on too much debt?

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 thinking about how risky a particular stock is It may be obvious that you need to consider debt, because too much debt can ruin a business. We can see that Flat Glass Group Co., Ltd. (HKG:6865) uses debt in its business. But the more important question is: How much risk does this debt pose?

When is debt a problem?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario involves having to raise new equity capital at a low price, resulting in permanent shareholder dilution. However, the most common situation is for a company to manage its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Flat Glass Group

How much is Flat Glass Group’s net debt?

You can click on the graphic below to see the historical numbers. However, it shows that Flat Glass Group had CN¥14.9 billion in debt as of September 2024, up from CN¥12.9 billion in a year. However, the company also had CN¥5.53b in cash, so its net debt is CN¥9.37b.

A look at Flat Glass Group’s liabilities

Zooming in on the latest balance sheet data, we can see that Flat Glass Group had liabilities of CN¥9.11b due within 12 months and liabilities of CN¥12.6b ¥ that were due beyond this. Offsetting this, it had CN¥5.53b in cash and CN¥7.06b in receivables that were due within 12 months. So its liabilities total CN¥9.14b more than the combination of its cash and short-term receivables.

Since Flat Glass Group’s listed shares have a total value of CN¥53.9 billion, it seems unlikely that this level of liabilities would pose much of a threat. But there are enough liabilities that we would definitely recommend that shareholders keep an eye on the balance sheet in the future.

To measure a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

Flat Glass Group’s net debt is 1.8 times EBITDA, which isn’t all that much, but its interest coverage seems a bit low since EBIT is only 6.6 times interest expense. While these numbers don’t worry us, it’s worth noting that the cost of the company’s debt has a real impact. Unfortunately, Flat Glass Group’s EBIT actually fell by 7.9% over the last year. If this earnings trend continues, the company’s debt load will be as big as the heart of a polar bear watching its only cub. There is no doubt that the balance sheet is where we learn the most about debt. But it is future earnings that will determine whether Flat Glass Group can maintain a healthy balance sheet in the future. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

And finally, while the tax officer is happy about accounting profits, lenders only accept cold hard cash. So the logical step is to examine the proportion of that EBIT that corresponds to actual free cash flow. Over the past three years, Flat Glass Group has burned through a lot of cash. While investors undoubtedly expect this situation to reverse in due course, it clearly means that using debt is riskier.

Our view

Flat Glass Group’s difficulties converting EBIT to free cash flow made us doubt the company’s balance sheet strength, but the other data points we considered were relatively encouraging. On the bright side, the company’s ability to cover its interest expense with its EBIT isn’t all that bad. When we consider all the factors discussed, it seems to us that Flat Glass Group is taking certain risks by using debt. Although this debt can boost returns, we believe the company has enough leverage now. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. For this purpose, you should be aware of this 3 warning signs We discovered it at Flat Glass Group.

Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.