The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shanghai Feilo Acoustics Co.,Ltd (SHSE:600651) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Shanghai Feilo AcousticsLtd's Debt?

The chart below, which you can click on for greater detail, shows that Shanghai Feilo AcousticsLtd had CN¥895.8m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥1.13b in cash, leading to a CN¥230.7m net cash position.

How Healthy Is Shanghai Feilo AcousticsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Feilo AcousticsLtd had liabilities of CN¥963.7m due within 12 months and liabilities of CN¥741.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥789.3m due within 12 months. So it can boast CN¥211.1m more liquid assets than total liabilities.

Having regard to Shanghai Feilo AcousticsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥11.5b company is short on cash, but still worth keeping an eye on the balance sheet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai Feilo AcousticsLtd's earnings that will influence how the balance sheet holds up in the future. 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, Shanghai Feilo AcousticsLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Shanghai Feilo AcousticsLtd?

Although Shanghai Feilo AcousticsLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥49m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shanghai Feilo AcousticsLtd , and understanding them should be part of your investment process.

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.