Is StarPower Semiconductor (SHSE:603290) A Risky Investment?

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. Importantly, StarPower Semiconductor Ltd. (SHSE:603290) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for StarPower Semiconductor

What Is StarPower Semiconductor's Debt?

As you can see below, at the end of March 2024, StarPower Semiconductor had CN¥1.10b of debt, up from CN¥882.7m a year ago. Click the image for more detail. However, it does have CN¥1.13b in cash offsetting this, leading to net cash of CN¥26.6m.

A Look At StarPower Semiconductor's Liabilities

According to the last reported balance sheet, StarPower Semiconductor had liabilities of CN¥783.9m due within 12 months, and liabilities of CN¥1.37b due beyond 12 months. Offsetting this, it had CN¥1.13b in cash and CN¥1.41b in receivables that were due within 12 months. So it actually has CN¥380.0m more liquid assets than total liabilities.

This surplus suggests that StarPower Semiconductor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if StarPower Semiconductor 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 that may be a result of expenditure for growth, it does make the debt far 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. 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 StarPower Semiconductor (of which 1 is significant!) you should know about.

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.

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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.