Is Foshan Blue Rocket ElectronicsLtd (SZSE:301348) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Foshan Blue Rocket Electronics Co.,Ltd. (SZSE:301348) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Foshan Blue Rocket ElectronicsLtd

What Is Foshan Blue Rocket ElectronicsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Foshan Blue Rocket ElectronicsLtd had CN¥59.5m of debt in June 2024, down from CN¥66.2m, one year before. But on the other hand it also has CN¥833.2m in cash, leading to a CN¥773.8m net cash position.

A Look At Foshan Blue Rocket ElectronicsLtd's Liabilities

The latest balance sheet data shows that Foshan Blue Rocket ElectronicsLtd had liabilities of CN¥413.6m due within a year, and liabilities of CN¥28.5m falling due after that. Offsetting these obligations, it had cash of CN¥833.2m as well as receivables valued at CN¥479.5m due within 12 months. So it actually has CN¥870.7m more liquid assets than total liabilities.

This excess liquidity suggests that Foshan Blue Rocket ElectronicsLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Foshan Blue Rocket ElectronicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Foshan Blue Rocket ElectronicsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Foshan Blue Rocket ElectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to CN¥687m. We would much prefer see growth.

So How Risky Is Foshan Blue Rocket ElectronicsLtd?

While Foshan Blue Rocket ElectronicsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥10m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Foshan Blue Rocket ElectronicsLtd has 5 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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.