David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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 Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 FIH Mobile had US$865.8m of debt, an increase on US$710.9m, over one year. But it also has US$1.76b in cash to offset that, meaning it has US$898.8m net cash.
A Look At FIH Mobile's Liabilities
According to the last reported balance sheet, FIH Mobile had liabilities of US$3.15b due within 12 months, and liabilities of US$19.9m due beyond 12 months. Offsetting this, it had US$1.76b in cash and US$849.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$555.9m.
This is a mountain of leverage relative to its market capitalization of US$860.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, FIH Mobile boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if FIH Mobile can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, FIH Mobile made a loss at the EBIT level, and saw its revenue drop to US$5.7b, which is a fall of 29%. That makes us nervous, to say the least.
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$419m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting FIH Mobile insider transactions.
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.