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 note that ASR Microelectronics Co., Ltd. (SHSE:688220) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is ASR Microelectronics's Debt?

As you can see below, at the end of September 2024, ASR Microelectronics had CN¥100.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.54b in cash, so it actually has CN¥3.44b net cash.

How Healthy Is ASR Microelectronics' Balance Sheet?

According to the last reported balance sheet, ASR Microelectronics had liabilities of CN¥769.9m due within 12 months, and liabilities of CN¥125.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.54b as well as receivables valued at CN¥462.8m due within 12 months. So it actually has CN¥3.11b more liquid assets than total liabilities.

It's good to see that ASR Microelectronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that ASR Microelectronics 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 it is future earnings, more than anything, that will determine ASR Microelectronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, ASR Microelectronics reported revenue of CN¥3.3b, which is a gain of 37%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ASR Microelectronics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ASR Microelectronics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥679m and booked a CN¥492m accounting loss. But the saving grace is the CN¥3.44b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, ASR Microelectronics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. 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 ASR Microelectronics you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.