Would Sai MicroElectronics (SZSE:300456) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Sai MicroElectronics Inc. (SZSE:300456) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sai MicroElectronics

What Is Sai MicroElectronics's Net Debt?

As you can see below, at the end of March 2024, Sai MicroElectronics had CN¥747.6m of debt, up from CN¥377.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥668.3m, its net debt is less, at about CN¥79.3m.

How Healthy Is Sai MicroElectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sai MicroElectronics had liabilities of CN¥739.0m due within 12 months and liabilities of CN¥855.1m due beyond that. Offsetting this, it had CN¥668.3m in cash and CN¥748.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥177.7m more than its cash and near-term receivables, combined.

Having regard to Sai MicroElectronics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥12.6b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Sai MicroElectronics has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sai 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.

In the last year Sai MicroElectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to CN¥1.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Sai MicroElectronics managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥160m. 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¥481m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Sai MicroElectronics that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com