Here's Why Shenzhen Fine Made Electronics Group (SZSE:300671) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Shenzhen Fine Made Electronics Group

What Is Shenzhen Fine Made Electronics Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Fine Made Electronics Group had CN¥1.05b of debt, an increase on CN¥728.7m, over one year. However, because it has a cash reserve of CN¥1.05b, its net debt is less, at about CN¥2.43m.

A Look At Shenzhen Fine Made Electronics Group's Liabilities

The latest balance sheet data shows that Shenzhen Fine Made Electronics Group had liabilities of CN¥1.16b due within a year, and liabilities of CN¥154.8m falling due after that. Offsetting this, it had CN¥1.05b in cash and CN¥436.7m in receivables that were due within 12 months. So it can boast CN¥171.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Fine Made Electronics Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Shenzhen Fine Made Electronics Group has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Fine Made Electronics Group 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.

In the last year Shenzhen Fine Made Electronics Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥691m. We would much prefer see growth.

Caveat Emptor

Not only did Shenzhen Fine Made Electronics Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥461m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shenzhen Fine Made Electronics Group is showing 1 warning sign in our investment analysis , 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.