Is FIH Mobile (HKG:2038) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that FIH Mobile Limited (HKG:2038) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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. However, it does have US$1.76b in cash offsetting this, leading to net cash of US$783.6m.

How Healthy Is FIH Mobile's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FIH Mobile had liabilities of US$3.61b due within 12 months and liabilities of US$35.7m due beyond that. Offsetting these obligations, it had cash of US$1.76b as well as receivables valued at US$2.13b due within 12 months. So it actually has US$234.6m more liquid assets than total liabilities.

This surplus suggests that FIH Mobile is using debt in a way that is appears to be both safe and conservative. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months FIH Mobile lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$191m of cash and made a loss of US$102m. However, it has net cash of US$783.6m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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