Is FIH Mobile (HKG:2038) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, FIH Mobile Limited (HKG:2038) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for FIH Mobile

How Much Debt Does FIH Mobile Carry?

The image below, which you can click on for greater detail, shows that FIH Mobile had debt of US$710.9m at the end of June 2023, a reduction from US$1.04b over a year. But it also has US$1.29b in cash to offset that, meaning it has US$577.4m net cash.

A Look At FIH Mobile's Liabilities

Zooming in on the latest balance sheet data, we can see that FIH Mobile had liabilities of US$3.07b due within 12 months and liabilities of US$14.9m due beyond that. On the other hand, it had cash of US$1.29b and US$1.52b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$281.9m.

FIH Mobile has a market capitalization of US$556.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, FIH Mobile also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is FIH Mobile's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FIH Mobile had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to US$7.9b. That's not what we would hope to see.

So How Risky Is FIH Mobile?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year FIH Mobile had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$126m of cash and made a loss of US$98m. But at least it has US$577.4m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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.

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.