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.' 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 Mianyang Fulin Precision Co.,Ltd. (SZSE:300432) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Mianyang Fulin PrecisionLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Mianyang Fulin PrecisionLtd had debt of CN¥1.59b, up from CN¥535.2m in one year. However, its balance sheet shows it holds CN¥1.78b in cash, so it actually has CN¥191.1m net cash.

A Look At Mianyang Fulin PrecisionLtd's Liabilities

According to the last reported balance sheet, Mianyang Fulin PrecisionLtd had liabilities of CN¥4.38b due within 12 months, and liabilities of CN¥708.5m due beyond 12 months. Offsetting this, it had CN¥1.78b in cash and CN¥2.19b in receivables that were due within 12 months. So its liabilities total CN¥1.12b more than the combination of its cash and short-term receivables.

Since publicly traded Mianyang Fulin PrecisionLtd shares are worth a total of CN¥8.98b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mianyang Fulin PrecisionLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mianyang Fulin PrecisionLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Mianyang Fulin PrecisionLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Mianyang Fulin PrecisionLtd?

Although Mianyang Fulin PrecisionLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥19m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mianyang Fulin PrecisionLtd is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.