Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Halo Microelectronics Co., Ltd. (SHSE:688173) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Halo Microelectronics's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Halo Microelectronics had debt of CN¥14.8m, up from CN¥221.5k in one year. But on the other hand it also has CN¥1.13b in cash, leading to a CN¥1.11b net cash position.

How Healthy Is Halo Microelectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Halo Microelectronics had liabilities of CN¥184.8m due within 12 months and liabilities of CN¥2.60m due beyond that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥181.7m due within 12 months. So it actually has CN¥1.12b more liquid assets than total liabilities.

This surplus suggests that Halo Microelectronics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Halo 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 it is future earnings, more than anything, that will determine Halo Microelectronics'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.

In the last year Halo Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to CN¥481m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Halo Microelectronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Halo Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥386m of cash and made a loss of CN¥156m. With only CN¥1.11b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Halo Microelectronics has 1 warning sign we think you should be aware of.

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.