Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Tianma Microelectronics Co., Ltd. (SZSE:000050) does carry debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Tianma Microelectronics's Debt?

As you can see below, Tianma Microelectronics had CN¥37.6b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥8.29b in cash leading to net debt of about CN¥29.4b.

How Strong Is Tianma Microelectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tianma Microelectronics had liabilities of CN¥20.6b due within 12 months and liabilities of CN¥32.4b due beyond that. Offsetting these obligations, it had cash of CN¥8.29b as well as receivables valued at CN¥8.46b due within 12 months. So its liabilities total CN¥36.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥22.2b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Tianma Microelectronics would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tianma Microelectronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Tianma Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 2.6%, to CN¥32b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Tianma Microelectronics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥2.8b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥446m in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tianma Microelectronics you should know about.

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.