Focus Lightings Tech (SZSE:300708) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Focus Lightings Tech Co., Ltd. (SZSE:300708) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Focus Lightings Tech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Focus Lightings Tech had CN¥525.0m of debt in December 2024, down from CN¥875.2m, one year before. However, it does have CN¥1.69b in cash offsetting this, leading to net cash of CN¥1.17b.

A Look At Focus Lightings Tech's Liabilities

The latest balance sheet data shows that Focus Lightings Tech had liabilities of CN¥1.91b due within a year, and liabilities of CN¥3.51m falling due after that. Offsetting this, it had CN¥1.69b in cash and CN¥748.0m in receivables that were due within 12 months. So it actually has CN¥525.6m more liquid assets than total liabilities.

This surplus suggests that Focus Lightings Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Focus Lightings Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Focus Lightings Tech

Even more impressive was the fact that Focus Lightings Tech grew its EBIT by 316% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Focus Lightings Tech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Focus Lightings Tech 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. In the last two years, Focus Lightings Tech's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Focus Lightings Tech has net cash of CN¥1.17b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 316% over the last year. So we don't think Focus Lightings Tech's use of debt is 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 instance, we've identified 1 warning sign for Focus Lightings Tech that you should be aware of.

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.