These 4 Measures Indicate That Fibocom Wireless (SZSE:300638) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Fibocom Wireless Inc. (SZSE:300638) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fibocom Wireless

How Much Debt Does Fibocom Wireless Carry?

As you can see below, Fibocom Wireless had CN¥1.03b of debt at September 2024, down from CN¥1.33b a year prior. But on the other hand it also has CN¥1.35b in cash, leading to a CN¥317.4m net cash position.

How Healthy Is Fibocom Wireless' Balance Sheet?

We can see from the most recent balance sheet that Fibocom Wireless had liabilities of CN¥3.52b falling due within a year, and liabilities of CN¥386.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.35b as well as receivables valued at CN¥3.02b due within 12 months. So it actually has CN¥457.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Fibocom Wireless could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fibocom Wireless has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Fibocom Wireless grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fibocom Wireless'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fibocom Wireless has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Fibocom Wireless recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fibocom Wireless has net cash of CN¥317.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't think Fibocom Wireless's use of debt is 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. Case in point: We've spotted 2 warning signs for Fibocom Wireless you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.