Is ASR Microelectronics (SHSE:688220) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that ASR Microelectronics Co., Ltd. (SHSE:688220) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ASR Microelectronics

How Much Debt Does ASR Microelectronics Carry?

As you can see below, at the end of September 2024, ASR Microelectronics had CN¥100.7m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥3.54b in cash, leading to a CN¥3.44b net cash position.

A Look At ASR Microelectronics' Liabilities

We can see from the most recent balance sheet that ASR Microelectronics had liabilities of CN¥769.9m falling due within a year, and liabilities of CN¥125.9m due beyond that. On the other hand, it had cash of CN¥3.54b and CN¥462.8m worth of receivables due within a year. So it actually has CN¥3.11b more liquid assets than total liabilities.

This short term liquidity is a sign that ASR Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ASR Microelectronics has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ASR Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to CN¥3.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ASR Microelectronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year ASR Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥679m and booked a CN¥492m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.44b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, ASR Microelectronics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ASR Microelectronics is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.