Is National Silicon Industry GroupLtd (SHSE:688126) Weighed On By Its Debt Load?

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. As with many other companies National Silicon Industry Group Co.,Ltd. (SHSE:688126) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for National Silicon Industry GroupLtd

What Is National Silicon Industry GroupLtd's Debt?

As you can see below, at the end of March 2024, National Silicon Industry GroupLtd had CN¥5.11b of debt, up from CN¥2.83b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.42b in cash, so it actually has CN¥1.31b net cash.

How Strong Is National Silicon Industry GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that National Silicon Industry GroupLtd had liabilities of CN¥2.79b falling due within a year, and liabilities of CN¥5.53b due beyond that. Offsetting these obligations, it had cash of CN¥6.42b as well as receivables valued at CN¥957.0m due within 12 months. So its liabilities total CN¥945.2m more than the combination of its cash and short-term receivables.

Of course, National Silicon Industry GroupLtd has a market capitalization of CN¥37.2b, 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, National Silicon Industry GroupLtd 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 future earnings, more than anything, that will determine National Silicon Industry GroupLtd'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 National Silicon Industry GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥3.1b. We would much prefer see growth.

So How Risky Is National Silicon Industry GroupLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months National Silicon Industry GroupLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥4.7b of cash and made a loss of CN¥116m. With only CN¥1.31b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 National Silicon Industry GroupLtd'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.