David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Fujian Furi Electronics Co.,Ltd (SHSE:600203) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Fujian Furi ElectronicsLtd's Debt?
The chart below, which you can click on for greater detail, shows that Fujian Furi ElectronicsLtd had CN¥2.78b in debt in September 2023; about the same as the year before. However, because it has a cash reserve of CN¥1.25b, its net debt is less, at about CN¥1.53b.
A Look At Fujian Furi ElectronicsLtd's Liabilities
The latest balance sheet data shows that Fujian Furi ElectronicsLtd had liabilities of CN¥4.50b due within a year, and liabilities of CN¥990.1m falling due after that. Offsetting this, it had CN¥1.25b in cash and CN¥2.21b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.02b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Fujian Furi ElectronicsLtd is worth CN¥3.67b, and thus could probably raise enough capital to shore up 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fujian Furi ElectronicsLtd's earnings that will influence how the balance sheet holds up in the future. 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, Fujian Furi ElectronicsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 36%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Fujian Furi ElectronicsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥233m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥113m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Fujian Furi ElectronicsLtd (including 1 which makes us a bit uncomfortable) .
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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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.
