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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that FIH Mobile Limited (HKG:2038) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for FIH Mobile

How Much Debt Does FIH Mobile Carry?

The image below, which you can click on for greater detail, shows that FIH Mobile had debt of US$710.9m at the end of June 2023, a reduction from US$1.04b over a year. But it also has US$1.29b in cash to offset that, meaning it has US$577.4m net cash.

How Strong Is FIH Mobile's Balance Sheet?

According to the last reported balance sheet, FIH Mobile had liabilities of US$3.07b due within 12 months, and liabilities of US$14.9m due beyond 12 months. Offsetting this, it had US$1.29b in cash and US$1.52b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$281.9m.

While this might seem like a lot, it is not so bad since FIH Mobile has a market capitalization of US$728.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FIH Mobile'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.

In the last year FIH Mobile had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to US$7.9b. That's not what we would hope to see.

So How Risky Is FIH Mobile?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year FIH Mobile had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$126m and booked a US$98m accounting loss. But at least it has US$577.4m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like FIH Mobile I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.