Would Hunan Goke MicroelectronicsLtd (SZSE:300672) Be Better Off With Less Debt?

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. We note that Hunan Goke Microelectronics Co.,Ltd. (SZSE:300672) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Hunan Goke MicroelectronicsLtd

How Much Debt Does Hunan Goke MicroelectronicsLtd Carry?

As you can see below, at the end of September 2024, Hunan Goke MicroelectronicsLtd had CN¥2.16b of debt, up from CN¥1.13b a year ago. Click the image for more detail. However, it does have CN¥1.39b in cash offsetting this, leading to net debt of about CN¥764.5m.

How Healthy Is Hunan Goke MicroelectronicsLtd's Balance Sheet?

We can see from the most recent balance sheet that Hunan Goke MicroelectronicsLtd had liabilities of CN¥3.27b falling due within a year, and liabilities of CN¥433.9m due beyond that. Offsetting this, it had CN¥1.39b in cash and CN¥568.6m in receivables that were due within 12 months. So its liabilities total CN¥1.75b more than the combination of its cash and short-term receivables.

Given Hunan Goke MicroelectronicsLtd has a market capitalization of CN¥15.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Hunan Goke MicroelectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 42%, to CN¥2.2b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hunan Goke MicroelectronicsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥40m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥243m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hunan Goke MicroelectronicsLtd is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.