Rock star Growth Puts ASR Microelectronics (SHSE:688220) In A Position To Use Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, ASR Microelectronics Co., Ltd. (SHSE:688220) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 ASR Microelectronics had CN¥197.4m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥3.70b in cash, so it actually has CN¥3.51b net cash.

How Healthy Is ASR Microelectronics' Balance Sheet?

According to the last reported balance sheet, ASR Microelectronics had liabilities of CN¥772.4m due within 12 months, and liabilities of CN¥121.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.70b as well as receivables valued at CN¥450.0m due within 12 months. So it can boast CN¥3.26b more liquid assets than total liabilities.

This surplus suggests that ASR Microelectronics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, ASR Microelectronics 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 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.

Over 12 months, ASR Microelectronics reported revenue of CN¥3.2b, which is a gain of 51%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ASR Microelectronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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¥833m and booked a CN¥435m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.51b. 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. To that end, you should be aware of the 1 warning sign we've spotted with ASR Microelectronics .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.