Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zhuhai Aerospace Microchips Science & Technology Co., Ltd. (SZSE:300053) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

The image below, which you can click on for greater detail, shows that at September 2023 Zhuhai Aerospace Microchips Science & Technology had debt of CN¥159.9m, up from CN¥136.0m in one year. But on the other hand it also has CN¥256.8m in cash, leading to a CN¥96.9m net cash position.

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

We can see from the most recent balance sheet that Zhuhai Aerospace Microchips Science & Technology had liabilities of CN¥510.0m falling due within a year, and liabilities of CN¥78.1m due beyond that. Offsetting these obligations, it had cash of CN¥256.8m as well as receivables valued at CN¥889.3m due within 12 months. So it actually has CN¥558.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhuhai Aerospace Microchips Science & Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhuhai Aerospace Microchips Science & Technology 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 it is Zhuhai Aerospace Microchips Science & Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhuhai Aerospace Microchips Science & Technology had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥378m. To be frank that doesn't bode well.

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 we do note that Zhuhai Aerospace Microchips Science & Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥19m of cash and made a loss of CN¥253m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥96.9m. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Zhuhai Aerospace Microchips Science & Technology (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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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.