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.' 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 Dosilicon Co., Ltd. (SHSE:688110) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Dosilicon's Net Debt?

As you can see below, Dosilicon had CN¥42.6m of debt at March 2024, down from CN¥63.5m a year prior. But on the other hand it also has CN¥1.71b in cash, leading to a CN¥1.66b net cash position.

How Healthy Is Dosilicon's Balance Sheet?

We can see from the most recent balance sheet that Dosilicon had liabilities of CN¥122.1m falling due within a year, and liabilities of CN¥24.6m due beyond that. Offsetting this, it had CN¥1.71b in cash and CN¥60.0m in receivables that were due within 12 months. So it can boast CN¥1.62b more liquid assets than total liabilities.

This excess liquidity suggests that Dosilicon is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Dosilicon 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 ultimately the future profitability of the business will decide if Dosilicon can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Dosilicon had a loss before interest and tax, and actually shrunk its revenue by 45%, to CN¥513m. That makes us nervous, to say the least.

So How Risky Is Dosilicon?

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 Dosilicon lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥357m and booked a CN¥316m accounting loss. With only CN¥1.66b 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 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 Dosilicon's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.