Health Check: How Prudently Does InfoVision Optoelectronics (Kunshan) (SHSE:688055) Use Debt?

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 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 note that InfoVision Optoelectronics (Kunshan) Co., Ltd. (SHSE:688055) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for InfoVision Optoelectronics (Kunshan)

How Much Debt Does InfoVision Optoelectronics (Kunshan) Carry?

The image below, which you can click on for greater detail, shows that InfoVision Optoelectronics (Kunshan) had debt of CN¥651.6m at the end of March 2024, a reduction from CN¥1.08b over a year. However, it does have CN¥2.09b in cash offsetting this, leading to net cash of CN¥1.43b.

How Strong Is InfoVision Optoelectronics (Kunshan)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InfoVision Optoelectronics (Kunshan) had liabilities of CN¥2.63b due within 12 months and liabilities of CN¥172.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.09b as well as receivables valued at CN¥589.9m due within 12 months. So its liabilities total CN¥131.0m more than the combination of its cash and short-term receivables.

Having regard to InfoVision Optoelectronics (Kunshan)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥9.93b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, InfoVision Optoelectronics (Kunshan) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since InfoVision Optoelectronics (Kunshan) 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, InfoVision Optoelectronics (Kunshan) reported revenue of CN¥3.9b, which is a gain of 7.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is InfoVision Optoelectronics (Kunshan)?

Although InfoVision Optoelectronics (Kunshan) had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥466m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for InfoVision Optoelectronics (Kunshan) you should be aware of.

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.