Phenix Optical (SHSE:600071) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Phenix Optical Company Limited (SHSE:600071) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Phenix Optical

How Much Debt Does Phenix Optical Carry?

The image below, which you can click on for greater detail, shows that Phenix Optical had debt of CN¥392.0m at the end of September 2024, a reduction from CN¥700.7m over a year. However, it does have CN¥145.7m in cash offsetting this, leading to net debt of about CN¥246.4m.

How Strong Is Phenix Optical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Phenix Optical had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥60.4m due beyond that. Offsetting this, it had CN¥145.7m in cash and CN¥537.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥529.0m more than its cash and near-term receivables, combined.

Of course, Phenix Optical has a market capitalization of CN¥6.70b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Phenix Optical 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.

Over 12 months, Phenix Optical made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 7.6%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Phenix Optical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥73m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥70m into a profit. So we do think this stock is quite 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. We've identified 2 warning signs with Phenix Optical (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.