Is Maxscend Microelectronics (SZSE:300782) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Maxscend Microelectronics Company Limited (SZSE:300782) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Maxscend Microelectronics

What Is Maxscend Microelectronics's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Maxscend Microelectronics had debt of CN¥576.9m, up from none in one year. However, it does have CN¥1.08b in cash offsetting this, leading to net cash of CN¥505.0m.

How Healthy Is Maxscend Microelectronics' Balance Sheet?

According to the last reported balance sheet, Maxscend Microelectronics had liabilities of CN¥1.65b due within 12 months, and liabilities of CN¥261.1m due beyond 12 months. Offsetting this, it had CN¥1.08b in cash and CN¥462.0m in receivables that were due within 12 months. So its liabilities total CN¥372.2m more than the combination of its cash and short-term receivables.

Having regard to Maxscend Microelectronics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥45.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Maxscend Microelectronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Maxscend Microelectronics grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. 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 Maxscend 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Maxscend Microelectronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Maxscend Microelectronics saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Maxscend Microelectronics has CN¥505.0m in net cash. And we liked the look of last year's 66% year-on-year EBIT growth. So we don't have any problem with Maxscend Microelectronics's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Maxscend Microelectronics that you should be aware of before investing here.

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.