Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Suzhou Novosense Microelectronics Co., Ltd. (SHSE:688052) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

How Much Debt Does Suzhou Novosense Microelectronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Suzhou Novosense Microelectronics had CN¥471.1m of debt, an increase on CN¥301.6m, over one year. But it also has CN¥3.54b in cash to offset that, meaning it has CN¥3.07b net cash.

How Strong Is Suzhou Novosense Microelectronics' Balance Sheet?

We can see from the most recent balance sheet that Suzhou Novosense Microelectronics had liabilities of CN¥466.8m falling due within a year, and liabilities of CN¥384.9m due beyond that. Offsetting this, it had CN¥3.54b in cash and CN¥361.0m in receivables that were due within 12 months. So it can boast CN¥3.05b more liquid assets than total liabilities.

This excess liquidity suggests that Suzhou Novosense Microelectronics 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 Suzhou Novosense 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 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 reported revenue of CN¥1.7b, which is a gain of 20%, 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 Suzhou Novosense Microelectronics?

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 Suzhou Novosense Microelectronics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥703m of cash and made a loss of CN¥462m. But the saving grace is the CN¥3.07b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Suzhou Novosense Microelectronics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Suzhou Novosense Microelectronics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.