Sai MicroElectronics (SZSE:300456) Is Making Moderate Use Of 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, Sai MicroElectronics Inc. (SZSE:300456) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sai MicroElectronics

What Is Sai MicroElectronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sai MicroElectronics had CN¥1.05b of debt, an increase on CN¥425.3m, over one year. On the flip side, it has CN¥719.7m in cash leading to net debt of about CN¥330.6m.

How Healthy Is Sai MicroElectronics' Balance Sheet?

We can see from the most recent balance sheet that Sai MicroElectronics had liabilities of CN¥771.6m falling due within a year, and liabilities of CN¥927.1m due beyond that. Offsetting this, it had CN¥719.7m in cash and CN¥625.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥354.0m more than its cash and near-term receivables, combined.

Since publicly traded Sai MicroElectronics shares are worth a total of CN¥13.8b, it seems unlikely that this level of liabilities would be a major 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 you can't view debt in total isolation; since Sai MicroElectronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sai MicroElectronics reported revenue of CN¥1.2b, which is a gain of 6.6%, 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.

Caveat Emptor

Importantly, Sai MicroElectronics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥226m. 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. Another cause for caution is that is bled CN¥220m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Sai MicroElectronics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.