Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Shenzhen Fine Made Electronics Group's Net Debt?

As you can see below, Shenzhen Fine Made Electronics Group had CN¥661.1m of debt at March 2024, down from CN¥751.6m a year prior. However, it does have CN¥514.0m in cash offsetting this, leading to net debt of about CN¥147.1m.

How Strong 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¥828.4m due within 12 months, and liabilities of CN¥155.6m due beyond 12 months. On the other hand, it had cash of CN¥514.0m and CN¥375.3m worth of receivables due within a year. So it has liabilities totalling CN¥94.7m more than its cash and near-term receivables, combined.

Having regard to Shenzhen Fine Made Electronics Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.73b company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Fine Made Electronics Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Fine Made Electronics Group wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥710m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shenzhen Fine Made Electronics Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥327m 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. However, it doesn't help that it burned through CN¥249m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Shenzhen Fine Made Electronics Group that you should be aware of before investing here.

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.

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.

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