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. Importantly, Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Shenzhen Fine Made Electronics Group
What Is Shenzhen Fine Made Electronics Group's Debt?
As you can see below, at the end of September 2023, Shenzhen Fine Made Electronics Group had CN¥1.05b of debt, up from CN¥728.7m a year ago. Click the image for more detail. However, it does have CN¥1.05b in cash offsetting this, leading to net debt of about CN¥2.43m.
How Healthy Is Shenzhen Fine Made Electronics Group's Balance Sheet?
According to the last reported balance sheet, Shenzhen Fine Made Electronics Group had liabilities of CN¥1.16b due within 12 months, and liabilities of CN¥154.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥436.7m due within 12 months. So it can boast CN¥171.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Shenzhen Fine Made Electronics Group could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Shenzhen Fine Made Electronics Group has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Fine Made Electronics Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Shenzhen Fine Made Electronics Group made a loss at the EBIT level, and saw its revenue drop to CN¥691m, which is a fall of 13%. That's not what we would hope to see.
Caveat Emptor
Not only did Shenzhen Fine Made Electronics Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥461m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shenzhen Fine Made Electronics Group has 1 warning sign we think you should be aware of.
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.