Is Mianyang Fulin PrecisionLtd (SZSE:300432) Using Debt In A Risky Way?

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 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 Mianyang Fulin Precision Co.,Ltd. (SZSE:300432) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Mianyang Fulin PrecisionLtd

What Is Mianyang Fulin PrecisionLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Mianyang Fulin PrecisionLtd had debt of CN¥816.8m, up from CN¥609.3m in one year. But it also has CN¥997.3m in cash to offset that, meaning it has CN¥180.5m net cash.

How Strong Is Mianyang Fulin PrecisionLtd's Balance Sheet?

We can see from the most recent balance sheet that Mianyang Fulin PrecisionLtd had liabilities of CN¥3.77b falling due within a year, and liabilities of CN¥782.8m due beyond that. On the other hand, it had cash of CN¥997.3m and CN¥2.35b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.21b.

Since publicly traded Mianyang Fulin PrecisionLtd shares are worth a total of CN¥16.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mianyang Fulin PrecisionLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mianyang Fulin PrecisionLtd 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 Mianyang Fulin PrecisionLtd's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Mianyang Fulin PrecisionLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Mianyang Fulin PrecisionLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥730m and booked a CN¥88m accounting loss. However, it has net cash of CN¥180.5m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Mianyang Fulin PrecisionLtd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.