We Think Hubei Feilihua Quartz Glass (SZSE:300395) Is Taking Some Risk With Its Debt

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.' 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 can see that Hubei Feilihua Quartz Glass Co., Ltd. (SZSE:300395) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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.

See our latest analysis for Hubei Feilihua Quartz Glass

How Much Debt Does Hubei Feilihua Quartz Glass Carry?

As you can see below, at the end of September 2024, Hubei Feilihua Quartz Glass had CN¥417.0m of debt, up from CN¥192.6m a year ago. Click the image for more detail. But it also has CN¥994.4m in cash to offset that, meaning it has CN¥577.5m net cash.

A Look At Hubei Feilihua Quartz Glass' Liabilities

We can see from the most recent balance sheet that Hubei Feilihua Quartz Glass had liabilities of CN¥1.03b falling due within a year, and liabilities of CN¥411.5m due beyond that. Offsetting this, it had CN¥994.4m in cash and CN¥952.4m in receivables that were due within 12 months. So it actually has CN¥509.4m more liquid assets than total liabilities.

This surplus suggests that Hubei Feilihua Quartz Glass has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hubei Feilihua Quartz Glass has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Hubei Feilihua Quartz Glass's load is not too heavy, because its EBIT was down 40% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hubei Feilihua Quartz Glass 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hubei Feilihua Quartz Glass may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hubei Feilihua Quartz Glass burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hubei Feilihua Quartz Glass has CN¥577.5m in net cash and a decent-looking balance sheet. So while Hubei Feilihua Quartz Glass does not have a great balance sheet, it's certainly not too bad. 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 instance, we've identified 1 warning sign for Hubei Feilihua Quartz Glass that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.