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 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. As with many other companies Foshan Blue Rocket Electronics Co.,Ltd. (SZSE:301348) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Foshan Blue Rocket ElectronicsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Foshan Blue Rocket ElectronicsLtd had CN¥59.5m of debt in June 2024, down from CN¥66.2m, one year before. But it also has CN¥833.2m in cash to offset that, meaning it has CN¥773.8m net cash.

A Look At Foshan Blue Rocket ElectronicsLtd's Liabilities

The latest balance sheet data shows that Foshan Blue Rocket ElectronicsLtd had liabilities of CN¥413.6m due within a year, and liabilities of CN¥28.5m falling due after that. Offsetting these obligations, it had cash of CN¥833.2m as well as receivables valued at CN¥479.5m due within 12 months. So it actually has CN¥870.7m more liquid assets than total liabilities.

It's good to see that Foshan Blue Rocket ElectronicsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Foshan Blue Rocket ElectronicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Foshan Blue Rocket ElectronicsLtd 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.

In the last year Foshan Blue Rocket ElectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to CN¥687m. We would much prefer see growth.

So How Risky Is Foshan Blue Rocket ElectronicsLtd?

While Foshan Blue Rocket ElectronicsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥10m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 5 warning signs with Foshan Blue Rocket ElectronicsLtd (at least 3 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.