David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Suzhou Novosense Microelectronics Co., Ltd. (SHSE:688052) makes use of debt. But the more important question is: how much risk is that debt creating?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Suzhou Novosense Microelectronics
The image below, which you can click on for greater detail, shows that at September 2024 Suzhou Novosense Microelectronics had debt of CN¥471.1m, up from CN¥301.6m in one year. However, its balance sheet shows it holds CN¥3.54b in cash, so it actually has CN¥3.07b net cash.
Zooming in on the latest balance sheet data, we can see that Suzhou Novosense Microelectronics had liabilities of CN¥466.8m due within 12 months and liabilities of CN¥384.9m due beyond that. Offsetting these obligations, it had cash of CN¥3.54b as well as receivables valued at CN¥361.0m due within 12 months. So it can boast CN¥3.05b more liquid assets than total liabilities.
It's good to see that Suzhou Novosense Microelectronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Suzhou Novosense Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Suzhou Novosense Microelectronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Suzhou Novosense Microelectronics reported revenue of CN¥1.7b, which is a gain of 20%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Suzhou Novosense Microelectronics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥703m and booked a CN¥462m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.07b. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Suzhou Novosense Microelectronics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Suzhou Novosense 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.