Is Foshan Blue Rocket ElectronicsLtd (SZSE:301348) A Risky Investment?

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 Foshan Blue Rocket Electronics Co.,Ltd. (SZSE:301348) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Foshan Blue Rocket ElectronicsLtd

What Is Foshan Blue Rocket ElectronicsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Foshan Blue Rocket ElectronicsLtd had debt of CN¥79.4m, up from CN¥66.9m in one year. But on the other hand it also has CN¥857.8m in cash, leading to a CN¥778.4m net cash position.

A Look At Foshan Blue Rocket ElectronicsLtd's Liabilities

According to the last reported balance sheet, Foshan Blue Rocket ElectronicsLtd had liabilities of CN¥373.6m due within 12 months, and liabilities of CN¥30.6m due beyond 12 months. On the other hand, it had cash of CN¥857.8m and CN¥449.3m worth of receivables due within a year. So it actually has CN¥902.9m more liquid assets than total liabilities.

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

In fact Foshan Blue Rocket ElectronicsLtd's saving grace is its low debt levels, because its EBIT has tanked 90% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Foshan Blue Rocket ElectronicsLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Foshan Blue Rocket ElectronicsLtd 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. During the last three years, Foshan Blue Rocket ElectronicsLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Foshan Blue Rocket ElectronicsLtd has net cash of CN¥778.4m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Foshan Blue Rocket ElectronicsLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Foshan Blue Rocket ElectronicsLtd (including 3 which don't sit too well with us) .

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.

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