FIH Mobile (HKG:2038) Has Debt But No Earnings; Should You Worry?

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.' 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 note that FIH Mobile Limited (HKG:2038) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for FIH Mobile

What Is FIH Mobile's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 FIH Mobile had debt of US$974.1m, up from US$837.1m in one year. But on the other hand it also has US$1.76b in cash, leading to a US$783.6m net cash position.

How Healthy Is FIH Mobile's Balance Sheet?

We can see from the most recent balance sheet that FIH Mobile had liabilities of US$3.61b falling due within a year, and liabilities of US$35.7m due beyond that. On the other hand, it had cash of US$1.76b and US$2.13b worth of receivables due within a year. So it can boast US$234.6m more liquid assets than total liabilities.

This excess liquidity suggests that FIH Mobile is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that FIH Mobile has more cash than debt is arguably a good indication that it can manage its debt safely. 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 FIH Mobile'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 FIH Mobile had a loss before interest and tax, and actually shrunk its revenue by 21%, to US$9.2b. That makes us nervous, to say the least.

So How Risky Is FIH Mobile?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that FIH Mobile had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$26m and booked a US$102m accounting loss. But at least it has US$783.6m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like FIH Mobile I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.