These 4 Measures Indicate That Focus Lightings Tech (SZSE:300708) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Focus Lightings Tech Co., Ltd. (SZSE:300708) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Focus Lightings Tech

What Is Focus Lightings Tech's Net Debt?

As you can see below, at the end of June 2024, Focus Lightings Tech had CN¥766.0m of debt, up from CN¥675.1m a year ago. Click the image for more detail. However, it does have CN¥1.97b in cash offsetting this, leading to net cash of CN¥1.21b.

A Look At Focus Lightings Tech's Liabilities

We can see from the most recent balance sheet that Focus Lightings Tech had liabilities of CN¥1.98b falling due within a year, and liabilities of CN¥135.3k due beyond that. Offsetting these obligations, it had cash of CN¥1.97b as well as receivables valued at CN¥809.7m due within 12 months. So it actually has CN¥804.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Focus Lightings Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Focus Lightings Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Focus Lightings Tech made a loss at the EBIT level, last year, it was also good to see that it generated CN¥136m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Focus Lightings Tech 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent year, Focus Lightings Tech recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Focus Lightings Tech has CN¥1.21b in net cash and a decent-looking balance sheet. So we don't have any problem with Focus Lightings Tech's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Focus Lightings Tech .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.