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. We note that Will Semiconductor Co., Ltd. (SHSE:603501) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Will Semiconductor

What Is Will Semiconductor's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Will Semiconductor had debt of CN¥13.2b, up from CN¥11.4b in one year. However, it does have CN¥5.84b in cash offsetting this, leading to net debt of about CN¥7.35b.

How Healthy Is Will Semiconductor's Balance Sheet?

The latest balance sheet data shows that Will Semiconductor had liabilities of CN¥11.4b due within a year, and liabilities of CN¥7.14b falling due after that. Offsetting these obligations, it had cash of CN¥5.84b as well as receivables valued at CN¥3.34b due within 12 months. So its liabilities total CN¥9.34b more than the combination of its cash and short-term receivables.

Since publicly traded Will Semiconductor shares are worth a very impressive total of CN¥121.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Will Semiconductor's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Will Semiconductor made a loss at the EBIT level, and saw its revenue drop to CN¥18b, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

While Will Semiconductor's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥565m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥1.1b into a profit. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Will Semiconductor's profit, revenue, and operating cashflow have changed over the last few years.

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.