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. We note that Suzhou Novosense Microelectronics Co., Ltd. (SHSE:688052) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Suzhou Novosense Microelectronics's Debt?

As you can see below, at the end of September 2023, Suzhou Novosense Microelectronics had CN¥306.6m of debt, up from CN¥28.4m a year ago. Click the image for more detail. However, it does have CN¥3.44b in cash offsetting this, leading to net cash of CN¥3.13b.

How Healthy Is Suzhou Novosense Microelectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Novosense Microelectronics had liabilities of CN¥516.8m due within 12 months and liabilities of CN¥34.0m due beyond that. On the other hand, it had cash of CN¥3.44b and CN¥282.4m worth of receivables due within a year. So it can boast CN¥3.17b more liquid assets than total liabilities.

This surplus suggests that Suzhou Novosense Microelectronics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Suzhou Novosense Microelectronics made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is Suzhou Novosense Microelectronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Suzhou Novosense Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥641m of cash and made a loss of CN¥236m. Given it only has net cash of CN¥3.13b, 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. For riskier companies like Suzhou Novosense Microelectronics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.