Is FIH Mobile (HKG:2038) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that FIH Mobile Limited (HKG:2038) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for FIH Mobile

What Is FIH Mobile's Debt?

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. However, it does have US$1.29b in cash offsetting this, leading to net cash of US$577.4m.

A Look At FIH Mobile's Liabilities

According to the last reported balance sheet, FIH Mobile had liabilities of US$3.07b due within 12 months, and liabilities of US$14.9m due beyond 12 months. Offsetting this, it had US$1.29b in cash and US$1.52b in receivables that were due within 12 months. So it has liabilities totalling US$281.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since FIH Mobile has a market capitalization of US$778.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, FIH Mobile boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if FIH Mobile can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, FIH Mobile made a loss at the EBIT level, and saw its revenue drop to US$7.9b, which is a fall of 9.4%. That's not what we would hope to see.

So How Risky Is FIH Mobile?

While FIH Mobile lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$266m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how FIH Mobile's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.