Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Zhuhai Aerospace Microchips Science & Technology Co., Ltd. (SZSE:300053) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, 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.

See our latest analysis for Zhuhai Aerospace Microchips Science & Technology

How Much Debt Does Zhuhai Aerospace Microchips Science & Technology Carry?

As you can see below, at the end of September 2023, Zhuhai Aerospace Microchips Science & Technology had CN¥159.9m of debt, up from CN¥136.0m a year ago. Click the image for more detail. But it also has CN¥256.8m in cash to offset that, meaning it has CN¥96.9m net cash.

How Strong Is Zhuhai Aerospace Microchips Science & Technology's Balance Sheet?

The latest balance sheet data shows that Zhuhai Aerospace Microchips Science & Technology had liabilities of CN¥510.0m due within a year, and liabilities of CN¥78.1m falling due after that. On the other hand, it had cash of CN¥256.8m and CN¥889.3m worth of receivables due within a year. So it actually has CN¥558.0m more liquid assets than total liabilities.

This surplus suggests that Zhuhai Aerospace Microchips Science & Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhuhai Aerospace Microchips Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhuhai Aerospace Microchips Science & Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Zhuhai Aerospace Microchips Science & Technology made a loss at the EBIT level, and saw its revenue drop to CN¥378m, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is Zhuhai Aerospace Microchips Science & Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Zhuhai Aerospace Microchips Science & Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥19m of cash and made a loss of CN¥253m. Given it only has net cash of CN¥96.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhuhai Aerospace Microchips Science & Technology you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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