We Think Fulin Precision (SZSE:300432) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Fulin Precision Co., Ltd. (SZSE:300432) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fulin Precision

What Is Fulin Precision's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Fulin Precision had CN¥1.19b of debt, an increase on CN¥910.0m, over one year. However, it also had CN¥1.09b in cash, and so its net debt is CN¥98.6m.

A Look At Fulin Precision's Liabilities

The latest balance sheet data shows that Fulin Precision had liabilities of CN¥4.09b due within a year, and liabilities of CN¥936.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥2.59b due within 12 months. So it has liabilities totalling CN¥1.35b more than its cash and near-term receivables, combined.

Of course, Fulin Precision has a market capitalization of CN¥20.9b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Fulin Precision has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fulin Precision can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Fulin Precision wasn't profitable at an EBIT level, but managed to grow its revenue by 9.8%, to CN¥7.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Fulin Precision had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥561m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥829m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Fulin Precision you should be aware of, and 1 of them is significant.

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.