Here's Why ASR Microelectronics (SHSE:688220) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ASR Microelectronics Co., Ltd. (SHSE:688220) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 ASR Microelectronics

What Is ASR Microelectronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 ASR Microelectronics had CN¥51.6m of debt, an increase on none, over one year. But on the other hand it also has CN¥4.59b in cash, leading to a CN¥4.54b net cash position.

How Strong Is ASR Microelectronics' Balance Sheet?

According to the last reported balance sheet, ASR Microelectronics had liabilities of CN¥816.4m due within 12 months, and liabilities of CN¥147.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.59b as well as receivables valued at CN¥403.0m due within 12 months. So it actually has CN¥4.03b more liquid assets than total liabilities.

This excess liquidity suggests that ASR Microelectronics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that ASR Microelectronics has more cash than debt is arguably a good indication that it can manage its debt safely.

Although ASR Microelectronics made a loss at the EBIT level, last year, it was also good to see that it generated CN¥513m in EBIT over the last twelve months. 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 ASR Microelectronics 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ASR Microelectronics 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 year, ASR Microelectronics 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 we empathize with investors who find debt concerning, you should keep in mind that ASR Microelectronics has net cash of CN¥4.54b, as well as more liquid assets than liabilities. So we are not troubled with ASR Microelectronics'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. Case in point: We've spotted 1 warning sign for ASR Microelectronics you should be aware of.

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.