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. Importantly, Fujian Forecam Optics Co., Ltd. (SHSE:688010) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Fujian Forecam Optics
What Is Fujian Forecam Optics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Fujian Forecam Optics had CN¥558.1m of debt, an increase on CN¥513.9m, over one year. However, it does have CN¥286.9m in cash offsetting this, leading to net debt of about CN¥271.2m.
How Healthy Is Fujian Forecam Optics' Balance Sheet?
We can see from the most recent balance sheet that Fujian Forecam Optics had liabilities of CN¥584.4m falling due within a year, and liabilities of CN¥187.5m due beyond that. Offsetting these obligations, it had cash of CN¥286.9m as well as receivables valued at CN¥354.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥130.3m.
Given Fujian Forecam Optics has a market capitalization of CN¥3.85b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fujian Forecam Optics 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.
Over 12 months, Fujian Forecam Optics reported revenue of CN¥770m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Fujian Forecam Optics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥30m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥64m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 3 warning signs for Fujian Forecam Optics (1 is concerning!) that you should be aware of before investing here.
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.