Is Tianma Microelectronics (SZSE:000050) Using Debt Sensibly?

Warren Buffett famously said, '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. We note that Tianma Microelectronics Co., Ltd. (SZSE:000050) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tianma Microelectronics

What Is Tianma Microelectronics's Debt?

You can click the graphic below for the historical numbers, but it shows that Tianma Microelectronics had CN¥35.1b of debt in September 2024, down from CN¥37.4b, one year before. However, it does have CN¥6.90b in cash offsetting this, leading to net debt of about CN¥28.2b.

A Look At Tianma Microelectronics' Liabilities

We can see from the most recent balance sheet that Tianma Microelectronics had liabilities of CN¥22.1b falling due within a year, and liabilities of CN¥28.9b due beyond that. Offsetting this, it had CN¥6.90b in cash and CN¥8.95b in receivables that were due within 12 months. So its liabilities total CN¥35.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥22.1b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tianma Microelectronics would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tianma Microelectronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tianma Microelectronics saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Tianma Microelectronics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥1.1b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥780m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. We've identified 1 warning sign with Tianma Microelectronics , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.