Does Aurora OptoelectronicsLtd (SHSE:600666) Have A Healthy Balance Sheet?

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.' 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 Aurora Optoelectronics Co.,Ltd. (SHSE:600666) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aurora OptoelectronicsLtd

How Much Debt Does Aurora OptoelectronicsLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Aurora OptoelectronicsLtd had debt of CN¥56.7m, up from CN¥13.0m in one year. However, it does have CN¥121.0m in cash offsetting this, leading to net cash of CN¥64.3m.

How Healthy Is Aurora OptoelectronicsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aurora OptoelectronicsLtd had liabilities of CN¥447.2m due within 12 months and liabilities of CN¥558.6m due beyond that. On the other hand, it had cash of CN¥121.0m and CN¥302.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥582.1m.

Of course, Aurora OptoelectronicsLtd has a market capitalization of CN¥6.94b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Aurora OptoelectronicsLtd 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 it is Aurora OptoelectronicsLtd'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.

Over 12 months, Aurora OptoelectronicsLtd reported revenue of CN¥377m, which is a gain of 3.9%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Aurora OptoelectronicsLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aurora OptoelectronicsLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥300m of cash and made a loss of CN¥532m. With only CN¥64.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Aurora OptoelectronicsLtd (of which 1 is potentially serious!) you should know about.

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.