Is Zhejiang Fenglong Electric (SZSE:002931) A Risky Investment?

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.' 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. Importantly, Zhejiang Fenglong Electric Co., Ltd. (SZSE:002931) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang Fenglong Electric

What Is Zhejiang Fenglong Electric's Net Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Fenglong Electric had debt of CN¥195.1m at the end of September 2024, a reduction from CN¥243.6m over a year. However, it does have CN¥249.3m in cash offsetting this, leading to net cash of CN¥54.2m.

How Healthy Is Zhejiang Fenglong Electric's Balance Sheet?

The latest balance sheet data shows that Zhejiang Fenglong Electric had liabilities of CN¥181.7m due within a year, and liabilities of CN¥162.8m falling due after that. Offsetting these obligations, it had cash of CN¥249.3m as well as receivables valued at CN¥157.5m due within 12 months. So it actually has CN¥62.3m more liquid assets than total liabilities.

This state of affairs indicates that Zhejiang Fenglong Electric's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.67b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Zhejiang Fenglong Electric has more cash than debt is arguably a good indication that 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 Zhejiang Fenglong Electric 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 Zhejiang Fenglong Electric wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CN¥456m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Zhejiang Fenglong Electric?

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 Zhejiang Fenglong Electric lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥15m and booked a CN¥11m accounting loss. With only CN¥54.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 2 warning signs for Zhejiang Fenglong Electric 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.

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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.