Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Toyou Feiji Electronics Co., Ltd. (SZSE:300302) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
See our latest analysis for Toyou Feiji Electronics
What Is Toyou Feiji Electronics's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Toyou Feiji Electronics had debt of CN¥345.3m, up from CN¥220.5m in one year. On the flip side, it has CN¥118.0m in cash leading to net debt of about CN¥227.4m.
A Look At Toyou Feiji Electronics' Liabilities
According to the last reported balance sheet, Toyou Feiji Electronics had liabilities of CN¥236.9m due within 12 months, and liabilities of CN¥180.7m due beyond 12 months. On the other hand, it had cash of CN¥118.0m and CN¥566.6m worth of receivables due within a year. So it actually has CN¥266.9m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Toyou Feiji Electronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Toyou Feiji Electronics had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥386m. We would much prefer see growth.
Caveat Emptor
While Toyou Feiji Electronics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥26m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Toyou Feiji Electronics , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.