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 Shanghai Feilo Acoustics Co.,Ltd (SHSE:600651) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai Feilo AcousticsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Feilo AcousticsLtd had CN¥894.7m of debt in March 2024, down from CN¥993.9m, one year before. But it also has CN¥1.02b in cash to offset that, meaning it has CN¥125.1m net cash.

How Healthy Is Shanghai Feilo AcousticsLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai Feilo AcousticsLtd had liabilities of CN¥941.0m due within 12 months, and liabilities of CN¥738.8m due beyond 12 months. On the other hand, it had cash of CN¥1.02b and CN¥836.9m worth of receivables due within a year. So it can boast CN¥176.8m more liquid assets than total liabilities.

This surplus suggests that Shanghai Feilo AcousticsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Feilo AcousticsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Feilo AcousticsLtd 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.

In the last year Shanghai Feilo AcousticsLtd had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥2.0b. To be frank that doesn't bode well.

So How Risky Is Shanghai Feilo AcousticsLtd?

While Shanghai Feilo AcousticsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥65m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shanghai Feilo AcousticsLtd is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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