Is Shanghai Feilo AcousticsLtd (SHSE:600651) Using Debt Sensibly?

Warren Buffett famously said, '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. Importantly, Shanghai Feilo Acoustics Co.,Ltd (SHSE:600651) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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 Shanghai Feilo AcousticsLtd

How Much Debt Does Shanghai Feilo AcousticsLtd Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Feilo AcousticsLtd had CN¥895.8m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥1.13b in cash, so it actually has CN¥230.7m net cash.

How Strong 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¥963.7m due within 12 months and liabilities of CN¥741.0m due beyond that. Offsetting this, it had CN¥1.13b in cash and CN¥789.3m in receivables that were due within 12 months. So it actually has CN¥211.1m more liquid assets than total liabilities.

Having regard to Shanghai Feilo AcousticsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥11.5b 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shanghai Feilo AcousticsLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

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¥49m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 1 warning sign for Shanghai Feilo AcousticsLtd that you should be aware of.

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.