Hunan Goke MicroelectronicsLtd (SZSE:300672) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Hunan Goke Microelectronics Co.,Ltd. (SZSE:300672) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Hunan Goke MicroelectronicsLtd

What Is Hunan Goke MicroelectronicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hunan Goke MicroelectronicsLtd had CN¥1.61b of debt, an increase on CN¥1.20b, over one year. However, its balance sheet shows it holds CN¥1.79b in cash, so it actually has CN¥179.6m net cash.

A Look At Hunan Goke MicroelectronicsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Hunan Goke MicroelectronicsLtd had liabilities of CN¥3.36b due within 12 months and liabilities of CN¥459.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.79b as well as receivables valued at CN¥798.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.23b.

Given Hunan Goke MicroelectronicsLtd has a market capitalization of CN¥10.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Hunan Goke MicroelectronicsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hunan Goke MicroelectronicsLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hunan Goke MicroelectronicsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 41%. To be frank that doesn't bode well.

So How Risky Is Hunan Goke MicroelectronicsLtd?

Although Hunan Goke MicroelectronicsLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥92m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. 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 Hunan Goke MicroelectronicsLtd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.