Is Shenzhen Sunmoon Microelectronics (SHSE:688699) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Shenzhen Sunmoon Microelectronics Co., Ltd (SHSE:688699) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenzhen Sunmoon Microelectronics

How Much Debt Does Shenzhen Sunmoon Microelectronics Carry?

As you can see below, at the end of September 2024, Shenzhen Sunmoon Microelectronics had CN¥44.1m of debt, up from CN¥4.51m a year ago. Click the image for more detail. But it also has CN¥214.7m in cash to offset that, meaning it has CN¥170.6m net cash.

How Healthy Is Shenzhen Sunmoon Microelectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Sunmoon Microelectronics had liabilities of CN¥200.2m due within 12 months and liabilities of CN¥49.3m due beyond that. Offsetting this, it had CN¥214.7m in cash and CN¥270.5m in receivables that were due within 12 months. So it actually has CN¥235.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Sunmoon Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Sunmoon Microelectronics boasts net cash, 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 it is Shenzhen Sunmoon Microelectronics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shenzhen Sunmoon Microelectronics made a loss at the EBIT level, and saw its revenue drop to CN¥582m, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is Shenzhen Sunmoon Microelectronics?

Although Shenzhen Sunmoon Microelectronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥3.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 2 warning signs with Shenzhen Sunmoon Microelectronics (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.