Is Forehope Electronic (Ningbo) (SHSE:688362) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Forehope Electronic (Ningbo) Co., Ltd. (SHSE:688362) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Forehope Electronic (Ningbo)

How Much Debt Does Forehope Electronic (Ningbo) Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Forehope Electronic (Ningbo) had CN¥5.14b of debt, an increase on CN¥2.98b, over one year. However, because it has a cash reserve of CN¥2.05b, its net debt is less, at about CN¥3.09b.

How Strong Is Forehope Electronic (Ningbo)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Forehope Electronic (Ningbo) had liabilities of CN¥3.00b due within 12 months and liabilities of CN¥6.21b due beyond that. On the other hand, it had cash of CN¥2.05b and CN¥684.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.47b.

This deficit is considerable relative to its market capitalization of CN¥7.93b, so it does suggest shareholders should keep an eye on Forehope Electronic (Ningbo)'s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Forehope Electronic (Ningbo) 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.

Over 12 months, Forehope Electronic (Ningbo) reported revenue of CN¥2.7b, which is a gain of 33%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Forehope Electronic (Ningbo) managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥59m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥2.2b of cash over the last year. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Forehope Electronic (Ningbo) you should know about.

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.