Health Check: How Prudently Does Foshan NationStar OptoelectronicsLtd (SZSE:002449) Use Debt?

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.' 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. Importantly, Foshan NationStar Optoelectronics Co.,Ltd (SZSE:002449) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Foshan NationStar OptoelectronicsLtd

What Is Foshan NationStar OptoelectronicsLtd's Debt?

As you can see below, at the end of September 2024, Foshan NationStar OptoelectronicsLtd had CN¥617.6m of debt, up from CN¥546.5m a year ago. Click the image for more detail. However, it does have CN¥1.56b in cash offsetting this, leading to net cash of CN¥946.1m.

How Healthy Is Foshan NationStar OptoelectronicsLtd's Balance Sheet?

According to the last reported balance sheet, Foshan NationStar OptoelectronicsLtd had liabilities of CN¥2.23b due within 12 months, and liabilities of CN¥379.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.56b as well as receivables valued at CN¥1.44b due within 12 months. So it actually has CN¥399.9m more liquid assets than total liabilities.

This surplus suggests that Foshan NationStar OptoelectronicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Foshan NationStar OptoelectronicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Foshan NationStar OptoelectronicsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Foshan NationStar OptoelectronicsLtd 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.

So How Risky Is Foshan NationStar OptoelectronicsLtd?

Although Foshan NationStar OptoelectronicsLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥71m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Foshan NationStar OptoelectronicsLtd (at least 1 which is significant) , and understanding them should be part of your investment process.

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.