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. As with many other companies Fujian Furi Electronics Co.,Ltd (SHSE:600203) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fujian Furi ElectronicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Fujian Furi ElectronicsLtd had CN¥3.17b of debt, an increase on CN¥2.78b, over one year. On the flip side, it has CN¥1.52b in cash leading to net debt of about CN¥1.65b.

A Look At Fujian Furi ElectronicsLtd's Liabilities

According to the last reported balance sheet, Fujian Furi ElectronicsLtd had liabilities of CN¥5.54b due within 12 months, and liabilities of CN¥310.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.52b as well as receivables valued at CN¥1.99b due within 12 months. So its liabilities total CN¥2.33b more than the combination of its cash and short-term receivables.

Fujian Furi ElectronicsLtd has a market capitalization of CN¥5.46b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fujian Furi ElectronicsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Fujian Furi ElectronicsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 7.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Fujian Furi ElectronicsLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥170m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥31m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Fujian Furi ElectronicsLtd is showing 2 warning signs in our investment analysis , you should know about...

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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