Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Suzhou Novosense Microelectronics Co., Ltd. (SHSE:688052) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Suzhou Novosense Microelectronics's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Suzhou Novosense Microelectronics had debt of CN¥607.2m, up from CN¥30.1m in one year. However, it does have CN¥3.94b in cash offsetting this, leading to net cash of CN¥3.34b.

How Healthy Is Suzhou Novosense Microelectronics' Balance Sheet?

According to the last reported balance sheet, Suzhou Novosense Microelectronics had liabilities of CN¥529.2m due within 12 months, and liabilities of CN¥368.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.94b as well as receivables valued at CN¥255.9m due within 12 months. So it can boast CN¥3.30b more liquid assets than total liabilities.

It's good to see that Suzhou Novosense Microelectronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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! When analysing debt levels, the balance sheet is the obvious place to start. 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¥1.2b, which is a fall of 33%. To be frank that doesn't bode well.

So How Risky Is Suzhou Novosense Microelectronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Suzhou Novosense Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥925m and booked a CN¥457m accounting loss. Given it only has net cash of CN¥3.34b, 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Suzhou Novosense Microelectronics you should know about.

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.

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