Is Shenzhen Fine Made Electronics Group (SZSE:300671) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Shenzhen Fine Made Electronics Group

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

The image below, which you can click on for greater detail, shows that Shenzhen Fine Made Electronics Group had debt of CN¥661.1m at the end of March 2024, a reduction from CN¥751.6m over a year. However, because it has a cash reserve of CN¥514.0m, its net debt is less, at about CN¥147.1m.

A Look At Shenzhen Fine Made Electronics Group's Liabilities

We can see from the most recent balance sheet that Shenzhen Fine Made Electronics Group had liabilities of CN¥828.4m falling due within a year, and liabilities of CN¥155.6m due beyond that. On the other hand, it had cash of CN¥514.0m and CN¥375.3m worth of receivables due within a year. So its liabilities total CN¥94.7m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Shenzhen Fine Made Electronics Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.73b company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Fine Made Electronics Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shenzhen Fine Made Electronics Group wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥710m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Shenzhen Fine Made Electronics Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥327m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥249m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 example - Shenzhen Fine Made Electronics Group has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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