Is ASR Microelectronics (SHSE:688220) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies ASR Microelectronics Co., Ltd. (SHSE:688220) 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ASR Microelectronics

What Is ASR Microelectronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 ASR Microelectronics had CN¥97.4m of debt, an increase on none, over one year. But on the other hand it also has CN¥4.24b in cash, leading to a CN¥4.15b net cash position.

How Strong Is ASR Microelectronics' Balance Sheet?

We can see from the most recent balance sheet that ASR Microelectronics had liabilities of CN¥791.6m falling due within a year, and liabilities of CN¥124.1m due beyond that. On the other hand, it had cash of CN¥4.24b and CN¥467.0m worth of receivables due within a year. So it can boast CN¥3.79b more liquid assets than total liabilities.

It's good to see that ASR Microelectronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, ASR Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ASR Microelectronics'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 ASR Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to CN¥3.0b. With any luck the company will be able to grow its way to profitability.

So How Risky Is ASR Microelectronics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year ASR Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥796m of cash and made a loss of CN¥435m. But the saving grace is the CN¥4.15b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. ASR Microelectronics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for ASR Microelectronics that 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.

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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.

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