Shaanxi Fenghuo Electronics (SZSE:000561) Is Carrying A Fair Bit 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.' 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. We can see that Shaanxi Fenghuo Electronics Co., Ltd. (SZSE:000561) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

Check out our latest analysis for Shaanxi Fenghuo Electronics

What Is Shaanxi Fenghuo Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shaanxi Fenghuo Electronics had CN¥541.8m of debt, an increase on CN¥313.9m, over one year. On the flip side, it has CN¥293.3m in cash leading to net debt of about CN¥248.5m.

A Look At Shaanxi Fenghuo Electronics' Liabilities

The latest balance sheet data shows that Shaanxi Fenghuo Electronics had liabilities of CN¥1.96b due within a year, and liabilities of CN¥219.4m falling due after that. Offsetting this, it had CN¥293.3m in cash and CN¥1.86b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Shaanxi Fenghuo Electronics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.26b company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shaanxi Fenghuo Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shaanxi Fenghuo Electronics had a loss before interest and tax, and actually shrunk its revenue by 8.8%, to CN¥1.4b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shaanxi Fenghuo Electronics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥13m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥385m of cash over the last year. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shaanxi Fenghuo Electronics's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.