Would Shanghai Bright Power Semiconductor (SHSE:688368) Be Better Off With Less 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shanghai Bright Power Semiconductor Co., Ltd. (SHSE:688368) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanghai Bright Power Semiconductor

How Much Debt Does Shanghai Bright Power Semiconductor Carry?

The image below, which you can click on for greater detail, shows that Shanghai Bright Power Semiconductor had debt of CN¥390.9m at the end of March 2024, a reduction from CN¥651.6m over a year. However, it also had CN¥265.6m in cash, and so its net debt is CN¥125.3m.

How Strong Is Shanghai Bright Power Semiconductor's Balance Sheet?

According to the last reported balance sheet, Shanghai Bright Power Semiconductor had liabilities of CN¥564.3m due within 12 months, and liabilities of CN¥204.1m due beyond 12 months. On the other hand, it had cash of CN¥265.6m and CN¥334.9m worth of receivables due within a year. So it has liabilities totalling CN¥168.0m more than its cash and near-term receivables, combined.

Since publicly traded Shanghai Bright Power Semiconductor shares are worth a total of CN¥4.69b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanghai Bright Power Semiconductor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shanghai Bright Power Semiconductor reported revenue of CN¥1.4b, which is a gain of 30%, 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.

Caveat Emptor

While we can certainly appreciate Shanghai Bright Power Semiconductor's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥59m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥61m into a profit. So in short it's a really risky stock. For riskier companies like Shanghai Bright Power Semiconductor I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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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.