Is Sihui Fuji Electronics Technology (SZSE:300852) A Risky Investment?

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.' 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. We can see that Sihui Fuji Electronics Technology Co., Ltd. (SZSE:300852) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sihui Fuji Electronics Technology

What Is Sihui Fuji Electronics Technology's Debt?

As you can see below, at the end of September 2024, Sihui Fuji Electronics Technology had CN¥482.8m of debt, up from CN¥455.1m a year ago. Click the image for more detail. But it also has CN¥997.3m in cash to offset that, meaning it has CN¥514.5m net cash.

How Strong Is Sihui Fuji Electronics Technology's Balance Sheet?

The latest balance sheet data shows that Sihui Fuji Electronics Technology had liabilities of CN¥446.5m due within a year, and liabilities of CN¥557.4m falling due after that. On the other hand, it had cash of CN¥997.3m and CN¥361.0m worth of receivables due within a year. So it actually has CN¥354.4m more liquid assets than total liabilities.

This surplus suggests that Sihui Fuji Electronics Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sihui Fuji Electronics Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Sihui Fuji Electronics Technology's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sihui Fuji Electronics Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sihui Fuji Electronics Technology 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, Sihui Fuji Electronics Technology recorded free cash flow of 21% 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 Sihui Fuji Electronics Technology has net cash of CN¥514.5m, as well as more liquid assets than liabilities. So we are not troubled with Sihui Fuji Electronics Technology's debt use. 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 Sihui Fuji Electronics Technology (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.