Is Mianyang Fulin PrecisionLtd (SZSE:300432) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Mianyang Fulin Precision Co.,Ltd. (SZSE:300432) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt 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 March 2024 Mianyang Fulin PrecisionLtd had debt of CN¥919.1m, up from CN¥535.2m in one year. However, its balance sheet shows it holds CN¥1.33b in cash, so it actually has CN¥406.4m net cash.

How Healthy Is Mianyang Fulin PrecisionLtd's Balance Sheet?

According to the last reported balance sheet, Mianyang Fulin PrecisionLtd had liabilities of CN¥3.89b due within 12 months, and liabilities of CN¥779.0m due beyond 12 months. Offsetting this, it had CN¥1.33b in cash and CN¥2.22b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.13b more than its cash and near-term receivables, combined.

Given Mianyang Fulin PrecisionLtd has a market capitalization of CN¥7.42b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mianyang Fulin PrecisionLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mianyang Fulin PrecisionLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Mianyang Fulin PrecisionLtd?

Although Mianyang Fulin PrecisionLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥19m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Mianyang Fulin PrecisionLtd that you should be aware of before investing here.

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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