Zhuhai Aerospace Microchips Science & Technology (SZSE:300053) Is Making Moderate Use Of Debt

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.' 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. Importantly, Zhuhai Aerospace Microchips Science & Technology Co., Ltd. (SZSE:300053) does carry debt. But is this debt a concern to shareholders?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhuhai Aerospace Microchips Science & Technology

What Is Zhuhai Aerospace Microchips Science & Technology's Debt?

As you can see below, at the end of September 2024, Zhuhai Aerospace Microchips Science & Technology had CN¥221.7m of debt, up from CN¥159.9m a year ago. Click the image for more detail. However, it also had CN¥207.8m in cash, and so its net debt is CN¥13.9m.

How Strong Is Zhuhai Aerospace Microchips Science & Technology's Balance Sheet?

According to the last reported balance sheet, Zhuhai Aerospace Microchips Science & Technology had liabilities of CN¥588.7m due within 12 months, and liabilities of CN¥74.1m due beyond 12 months. On the other hand, it had cash of CN¥207.8m and CN¥683.3m worth of receivables due within a year. So it can boast CN¥228.2m more liquid assets than total liabilities.

This surplus suggests that Zhuhai Aerospace Microchips Science & Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Zhuhai Aerospace Microchips Science & Technology has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhuhai Aerospace Microchips Science & Technology'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.

In the last year Zhuhai Aerospace Microchips Science & Technology had a loss before interest and tax, and actually shrunk its revenue by 34%, to CN¥250m. That makes us nervous, to say the least.

Caveat Emptor

While Zhuhai Aerospace Microchips Science & Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥329m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhuhai Aerospace Microchips Science & Technology you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.