Is Smarter Microelectronics (Guangzhou) (SHSE:688512) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Smarter Microelectronics (Guangzhou) Co., Ltd. (SHSE:688512) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Smarter Microelectronics (Guangzhou)

What Is Smarter Microelectronics (Guangzhou)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Smarter Microelectronics (Guangzhou) had CN¥106.3m of debt, an increase on none, over one year. But it also has CN¥844.3m in cash to offset that, meaning it has CN¥738.0m net cash.

How Strong Is Smarter Microelectronics (Guangzhou)'s Balance Sheet?

The latest balance sheet data shows that Smarter Microelectronics (Guangzhou) had liabilities of CN¥203.5m due within a year, and liabilities of CN¥154.0m falling due after that. Offsetting this, it had CN¥844.3m in cash and CN¥102.4m in receivables that were due within 12 months. So it actually has CN¥589.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Smarter Microelectronics (Guangzhou) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Smarter Microelectronics (Guangzhou) 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 it is future earnings, more than anything, that will determine Smarter Microelectronics (Guangzhou)'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.

Over 12 months, Smarter Microelectronics (Guangzhou) reported revenue of CN¥538m, which is a gain of 8.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Smarter Microelectronics (Guangzhou)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Smarter Microelectronics (Guangzhou) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥381m of cash and made a loss of CN¥397m. But at least it has CN¥738.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Smarter Microelectronics (Guangzhou) is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.