Focused Photonics (Hangzhou) (SZSE:300203) Is Making Moderate Use 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. Importantly, Focused Photonics (Hangzhou), Inc. (SZSE:300203) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Focused Photonics (Hangzhou)

What Is Focused Photonics (Hangzhou)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Focused Photonics (Hangzhou) had CN¥3.44b of debt in June 2024, down from CN¥3.83b, one year before. However, it also had CN¥864.0m in cash, and so its net debt is CN¥2.57b.

How Strong Is Focused Photonics (Hangzhou)'s Balance Sheet?

We can see from the most recent balance sheet that Focused Photonics (Hangzhou) had liabilities of CN¥3.52b falling due within a year, and liabilities of CN¥2.60b due beyond that. Offsetting these obligations, it had cash of CN¥864.0m as well as receivables valued at CN¥1.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.98b.

This is a mountain of leverage relative to its market capitalization of CN¥5.36b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Focused Photonics (Hangzhou) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Focused Photonics (Hangzhou) reported revenue of CN¥3.4b, which is a gain of 2.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Focused Photonics (Hangzhou) had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥154m. 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. For example, we would not want to see a repeat of last year's loss of CN¥140m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Focused Photonics (Hangzhou) is showing 1 warning sign in our investment analysis , you should know about...

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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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.