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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) 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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen Fine Made Electronics Group

What Is Shenzhen Fine Made Electronics Group's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Fine Made Electronics Group had debt of CN¥534.5m at the end of September 2024, a reduction from CN¥1.05b over a year. However, it also had CN¥376.1m in cash, and so its net debt is CN¥158.4m.

A Look At Shenzhen Fine Made Electronics Group's Liabilities

According to the last reported balance sheet, Shenzhen Fine Made Electronics Group had liabilities of CN¥716.3m due within 12 months, and liabilities of CN¥134.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥376.1m as well as receivables valued at CN¥373.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥101.1m.

Having regard to Shenzhen Fine Made Electronics Group's size, it seems that its liquid assets are well balanced with its total liabilities. 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. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Fine Made Electronics Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenzhen Fine Made Electronics Group had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥675m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Shenzhen Fine Made Electronics Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥240m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥278m. So to be blunt we do think it is risky. 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. We've identified 2 warning signs with Shenzhen Fine Made Electronics Group (at least 1 which is significant) , and understanding them should be part of your investment process.

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.