Shanghai New Vision Microelectronics (SHSE:688593) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shanghai New Vision Microelectronics Co., Ltd (SHSE:688593) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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.

View our latest analysis for Shanghai New Vision Microelectronics

How Much Debt Does Shanghai New Vision Microelectronics Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai New Vision Microelectronics had CN¥20.0m of debt in March 2024, down from CN¥22.6m, one year before. However, its balance sheet shows it holds CN¥941.8m in cash, so it actually has CN¥921.8m net cash.

A Look At Shanghai New Vision Microelectronics' Liabilities

According to the last reported balance sheet, Shanghai New Vision Microelectronics had liabilities of CN¥138.8m due within 12 months, and liabilities of CN¥1.89m due beyond 12 months. Offsetting these obligations, it had cash of CN¥941.8m as well as receivables valued at CN¥150.5m due within 12 months. So it actually has CN¥951.6m more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai New Vision Microelectronics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shanghai New Vision Microelectronics 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 you can't view debt in total isolation; since Shanghai New Vision Microelectronics will need earnings to service that debt. 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 16%, to CN¥483m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shanghai New Vision Microelectronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shanghai New Vision Microelectronics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥174m and booked a CN¥4.0m accounting loss. Given it only has net cash of CN¥921.8m, the company may need to raise more capital if it doesn't reach break-even 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 we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shanghai New Vision Microelectronics's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com