Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Toyou Feiji Electronics Co., Ltd. (SZSE:300302) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Toyou Feiji Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Toyou Feiji Electronics had CN¥403.8m of debt, an increase on CN¥262.0m, over one year. However, because it has a cash reserve of CN¥137.6m, its net debt is less, at about CN¥266.2m.

How Strong Is Toyou Feiji Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Toyou Feiji Electronics had liabilities of CN¥342.9m due within 12 months and liabilities of CN¥210.9m due beyond that. On the other hand, it had cash of CN¥137.6m and CN¥607.4m worth of receivables due within a year. So it can boast CN¥191.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Toyou Feiji Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Toyou Feiji Electronics 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.

Over 12 months, Toyou Feiji Electronics made a loss at the EBIT level, and saw its revenue drop to CN¥296m, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Toyou Feiji Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥67m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Toyou Feiji Electronics you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com