Is Hunan Goke MicroelectronicsLtd (SZSE:300672) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Hunan Goke Microelectronics Co.,Ltd. (SZSE:300672) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hunan Goke MicroelectronicsLtd

How Much Debt Does Hunan Goke MicroelectronicsLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Hunan Goke MicroelectronicsLtd had debt of CN¥1.13b, up from CN¥808.1m in one year. However, its balance sheet shows it holds CN¥1.20b in cash, so it actually has CN¥78.8m net cash.

How Strong Is Hunan Goke MicroelectronicsLtd's Balance Sheet?

According to the last reported balance sheet, Hunan Goke MicroelectronicsLtd had liabilities of CN¥2.98b due within 12 months, and liabilities of CN¥363.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.20b as well as receivables valued at CN¥572.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.57b.

Since publicly traded Hunan Goke MicroelectronicsLtd shares are worth a total of CN¥11.3b, it seems unlikely that this level of liabilities would be a major 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of CN¥3.9b, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Hunan Goke MicroelectronicsLtd?

While Hunan Goke MicroelectronicsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥112m. So taking that on face value, and considering the cash, we don't think its very risky in the near 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Hunan Goke MicroelectronicsLtd you should be aware of.

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.