Does Toyou Feiji Electronics (SZSE:300302) Have A Healthy Balance Sheet?

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 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 Toyou Feiji Electronics Co., Ltd. (SZSE:300302) makes use of 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Toyou Feiji Electronics

What Is Toyou Feiji Electronics's Debt?

As you can see below, at the end of June 2024, Toyou Feiji Electronics had CN¥451.5m of debt, up from CN¥301.2m a year ago. Click the image for more detail. However, it also had CN¥152.5m in cash, and so its net debt is CN¥299.1m.

How Healthy Is Toyou Feiji Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Toyou Feiji Electronics had liabilities of CN¥321.8m due within 12 months and liabilities of CN¥228.2m due beyond that. On the other hand, it had cash of CN¥152.5m and CN¥422.6m worth of receivables due within a year. So it actually has CN¥25.1m more liquid assets than total liabilities.

This state of affairs indicates that Toyou Feiji Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.44b company is short on cash, but still worth keeping an eye on the balance sheet. 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 Toyou Feiji Electronics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Toyou Feiji Electronics saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Toyou Feiji Electronics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥11m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Toyou Feiji Electronics (of which 1 is a bit concerning!) you should know about.

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.