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 can see that FIH Mobile Limited (HKG:2038) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does FIH Mobile Carry?

The image below, which you can click on for greater detail, shows that at June 2024 FIH Mobile had debt of US$865.8m, up from US$710.9m in one year. However, its balance sheet shows it holds US$1.76b in cash, so it actually has US$898.8m net cash.

A Look At FIH Mobile's Liabilities

We can see from the most recent balance sheet that FIH Mobile had liabilities of US$3.15b falling due within a year, and liabilities of US$19.9m due beyond that. Offsetting these obligations, it had cash of US$1.76b as well as receivables valued at US$849.1m due within 12 months. So it has liabilities totalling US$555.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$893.4m, so it does suggest shareholders should keep an eye on FIH Mobile's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, FIH Mobile also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if FIH Mobile can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, FIH Mobile made a loss at the EBIT level, and saw its revenue drop to US$5.7b, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is FIH Mobile?

Although FIH Mobile had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$419m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting FIH Mobile insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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