Is VeriSilicon Microelectronics (Shanghai) (SHSE:688521) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for VeriSilicon Microelectronics (Shanghai)

What Is VeriSilicon Microelectronics (Shanghai)'s Debt?

As you can see below, at the end of September 2024, VeriSilicon Microelectronics (Shanghai) had CN¥1.19b of debt, up from CN¥611.9m a year ago. Click the image for more detail. However, it also had CN¥819.4m in cash, and so its net debt is CN¥367.3m.

How Strong Is VeriSilicon Microelectronics (Shanghai)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VeriSilicon Microelectronics (Shanghai) had liabilities of CN¥1.43b due within 12 months and liabilities of CN¥979.7m due beyond that. On the other hand, it had cash of CN¥819.4m and CN¥1.42b worth of receivables due within a year. So its liabilities total CN¥172.0m more than the combination of its cash and short-term receivables.

Having regard to VeriSilicon Microelectronics (Shanghai)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥26.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, VeriSilicon Microelectronics (Shanghai) has virtually no net debt, 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 ultimately the future profitability of the business will decide if VeriSilicon Microelectronics (Shanghai) 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 VeriSilicon Microelectronics (Shanghai) had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥2.2b. We would much prefer see growth.

Caveat Emptor

While VeriSilicon Microelectronics (Shanghai)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥523m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥372m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - VeriSilicon Microelectronics (Shanghai) has 1 warning sign we think 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.