Is Zhejiang FORE Intelligent TechnologyLtd (SZSE:301368) Weighed On By Its Debt Load?

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.' 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. Importantly, Zhejiang FORE Intelligent Technology Co.,Ltd (SZSE:301368) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zhejiang FORE Intelligent TechnologyLtd

What Is Zhejiang FORE Intelligent TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang FORE Intelligent TechnologyLtd had CN¥16.8m of debt, an increase on CN¥2.62m, over one year. However, it does have CN¥145.9m in cash offsetting this, leading to net cash of CN¥129.2m.

How Healthy Is Zhejiang FORE Intelligent TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang FORE Intelligent TechnologyLtd had liabilities of CN¥275.4m due within 12 months, and liabilities of CN¥4.86m due beyond 12 months. Offsetting these obligations, it had cash of CN¥145.9m as well as receivables valued at CN¥181.1m due within 12 months. So it can boast CN¥46.7m more liquid assets than total liabilities.

Having regard to Zhejiang FORE Intelligent TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.54b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Zhejiang FORE Intelligent TechnologyLtd 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 FORE Intelligent TechnologyLtd 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.

Over 12 months, Zhejiang FORE Intelligent TechnologyLtd reported revenue of CN¥484m, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zhejiang FORE Intelligent TechnologyLtd?

While Zhejiang FORE Intelligent TechnologyLtd 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 think its revenue growth of 22% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. For example Zhejiang FORE Intelligent TechnologyLtd has 4 warning signs (and 3 which are concerning) we think you should know about.

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.