Here's Why StarPower Semiconductor (SHSE:603290) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that StarPower Semiconductor Ltd. (SHSE:603290) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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.

See our latest analysis for StarPower Semiconductor

What Is StarPower Semiconductor's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 StarPower Semiconductor had debt of CN¥1.10b, up from CN¥882.7m in one year. But it also has CN¥1.13b in cash to offset that, meaning it has CN¥26.6m net cash.

A Look At StarPower Semiconductor's Liabilities

Zooming in on the latest balance sheet data, we can see that StarPower Semiconductor had liabilities of CN¥783.9m due within 12 months and liabilities of CN¥1.37b due beyond that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥1.41b due within 12 months. So it actually has CN¥380.0m more liquid assets than total liabilities.

Having regard to StarPower Semiconductor's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥21.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that StarPower Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that StarPower Semiconductor grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if StarPower Semiconductor 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. StarPower Semiconductor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, StarPower Semiconductor burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case StarPower Semiconductor has CN¥26.6m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with StarPower Semiconductor's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for StarPower Semiconductor (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.