Is Shanghai Feilo AcousticsLtd (SHSE:600651) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shanghai Feilo Acoustics Co.,Ltd (SHSE:600651) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Feilo AcousticsLtd

What Is Shanghai Feilo AcousticsLtd's Debt?

The image below, which you can click on for greater detail, shows that Shanghai Feilo AcousticsLtd had debt of CN¥917.5m at the end of September 2023, a reduction from CN¥1.21b over a year. However, its balance sheet shows it holds CN¥1.05b in cash, so it actually has CN¥135.5m net cash.

How Healthy Is Shanghai Feilo AcousticsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Feilo AcousticsLtd had liabilities of CN¥1.02b due within 12 months and liabilities of CN¥763.0m due beyond that. Offsetting this, it had CN¥1.05b in cash and CN¥828.1m in receivables that were due within 12 months. So it can boast CN¥96.9m more liquid assets than total liabilities.

This state of affairs indicates that Shanghai Feilo AcousticsLtd'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¥8.00b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shanghai Feilo AcousticsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanghai Feilo AcousticsLtd 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 Shanghai Feilo AcousticsLtd had a loss before interest and tax, and actually shrunk its revenue by 61%, to CN¥2.0b. That makes us nervous, to say the least.

So How Risky Is Shanghai Feilo AcousticsLtd?

Although Shanghai Feilo AcousticsLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥12m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 1 warning sign with Shanghai Feilo AcousticsLtd , and understanding them should be part of your investment process.

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.