Health Check: How Prudently Does Shanghai New Vision Microelectronics (SHSE:688593) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shanghai New Vision Microelectronics Co., Ltd (SHSE:688593) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

See our latest analysis for Shanghai New Vision Microelectronics

What Is Shanghai New Vision Microelectronics's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai New Vision Microelectronics had debt of CN¥38.2m, up from CN¥29.0m in one year. However, it does have CN¥902.3m in cash offsetting this, leading to net cash of CN¥864.0m.

How Strong Is Shanghai New Vision Microelectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai New Vision Microelectronics had liabilities of CN¥245.2m due within 12 months and liabilities of CN¥2.36m due beyond that. Offsetting these obligations, it had cash of CN¥902.3m as well as receivables valued at CN¥158.0m due within 12 months. So it actually has CN¥812.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai New Vision Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai New Vision Microelectronics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai New Vision Microelectronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shanghai New Vision Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 3.1%, to CN¥473m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shanghai New Vision Microelectronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shanghai New Vision Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥105m of cash and made a loss of CN¥1.2m. With only CN¥864.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Shanghai New Vision Microelectronics that you should be aware of before investing here.

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.