Is VeriSilicon Microelectronics (Shanghai) (SHSE:688521) Weighed On By Its Debt Load?

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. We note that VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for VeriSilicon Microelectronics (Shanghai)

What Is VeriSilicon Microelectronics (Shanghai)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 VeriSilicon Microelectronics (Shanghai) had CN¥670.3m of debt, an increase on CN¥412.0m, over one year. However, its balance sheet shows it holds CN¥859.2m in cash, so it actually has CN¥188.9m net cash.

A Look At VeriSilicon Microelectronics (Shanghai)'s Liabilities

We can see from the most recent balance sheet that VeriSilicon Microelectronics (Shanghai) had liabilities of CN¥1.03b falling due within a year, and liabilities of CN¥828.2m due beyond that. Offsetting this, it had CN¥859.2m in cash and CN¥1.13b in receivables that were due within 12 months. So it actually has CN¥132.2m more liquid assets than total liabilities.

This state of affairs indicates that VeriSilicon Microelectronics (Shanghai)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥17.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, VeriSilicon Microelectronics (Shanghai) 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 VeriSilicon Microelectronics (Shanghai)'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, VeriSilicon Microelectronics (Shanghai) made a loss at the EBIT level, and saw its revenue drop to CN¥2.1b, which is a fall of 20%. That makes us nervous, to say the least.

So How Risky Is VeriSilicon Microelectronics (Shanghai)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that VeriSilicon Microelectronics (Shanghai) had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥99m of cash and made a loss of CN¥432m. With only CN¥188.9m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. For instance, we've identified 1 warning sign for VeriSilicon Microelectronics (Shanghai) that you should be aware of.

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.

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