Is Focused Photonics (Hangzhou) (SZSE:300203) 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 note that Focused Photonics (Hangzhou), Inc. (SZSE:300203) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Focused Photonics (Hangzhou)

What Is Focused Photonics (Hangzhou)'s Debt?

The image below, which you can click on for greater detail, shows that Focused Photonics (Hangzhou) had debt of CN¥3.67b at the end of March 2024, a reduction from CN¥3.92b over a year. However, because it has a cash reserve of CN¥1.09b, its net debt is less, at about CN¥2.57b.

A Look At Focused Photonics (Hangzhou)'s Liabilities

We can see from the most recent balance sheet that Focused Photonics (Hangzhou) had liabilities of CN¥3.73b falling due within a year, and liabilities of CN¥2.68b due beyond that. On the other hand, it had cash of CN¥1.09b and CN¥1.25b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.05b.

This deficit is considerable relative to its market capitalization of CN¥4.59b, so it does suggest shareholders should keep an eye on Focused Photonics (Hangzhou)'s use of debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Focused Photonics (Hangzhou) had a loss before interest and tax, and actually shrunk its revenue by 7.7%, to CN¥3.2b. We would much prefer see growth.

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¥243m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥261m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Focused Photonics (Hangzhou) has 1 warning sign we think you should be aware of.

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.

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