Shenzhen Fastprint Circuit TechLtd (SZSE:002436) Is Making Moderate Use Of 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.' 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 Shenzhen Fastprint Circuit Tech Co.,Ltd. (SZSE:002436) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Shenzhen Fastprint Circuit TechLtd

How Much Debt Does Shenzhen Fastprint Circuit TechLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Fastprint Circuit TechLtd had CN¥4.51b of debt, an increase on CN¥2.97b, over one year. However, it does have CN¥1.92b in cash offsetting this, leading to net debt of about CN¥2.59b.

How Healthy Is Shenzhen Fastprint Circuit TechLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Fastprint Circuit TechLtd had liabilities of CN¥3.44b falling due within a year, and liabilities of CN¥5.05b due beyond that. On the other hand, it had cash of CN¥1.92b and CN¥2.34b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.23b.

This deficit isn't so bad because Shenzhen Fastprint Circuit TechLtd is worth CN¥20.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Shenzhen Fastprint Circuit TechLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Fastprint Circuit TechLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.1%, to CN¥5.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Shenzhen Fastprint Circuit TechLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥35m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥1.6b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Shenzhen Fastprint Circuit TechLtd (at least 2 which are significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.