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. As with many other companies Semitronix Corporation (SZSE:301095) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Semitronix Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Semitronix had CN¥68.0m of debt, an increase on CN¥60.7m, over one year. But on the other hand it also has CN¥2.39b in cash, leading to a CN¥2.32b net cash position.

How Strong Is Semitronix's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Semitronix had liabilities of CN¥157.3m due within 12 months and liabilities of CN¥59.9m due beyond that. Offsetting these obligations, it had cash of CN¥2.39b as well as receivables valued at CN¥283.1m due within 12 months. So it can boast CN¥2.46b more liquid assets than total liabilities.

This luscious liquidity implies that Semitronix's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Semitronix has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Semitronix'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 Semitronix wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to CN¥500m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Semitronix?

While Semitronix lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥102m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 37% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Semitronix (1 is concerning) 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.