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. Importantly, Sai MicroElectronics Inc. (SZSE:300456) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sai MicroElectronics

What Is Sai MicroElectronics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Sai MicroElectronics had debt of CN¥547.7m, up from none in one year. But on the other hand it also has CN¥841.3m in cash, leading to a CN¥293.5m net cash position.

A Look At Sai MicroElectronics' Liabilities

According to the last reported balance sheet, Sai MicroElectronics had liabilities of CN¥608.1m due within 12 months, and liabilities of CN¥815.0m due beyond 12 months. On the other hand, it had cash of CN¥841.3m and CN¥901.9m worth of receivables due within a year. So it can boast CN¥320.0m more liquid assets than total liabilities.

This state of affairs indicates that Sai MicroElectronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥17.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Sai 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 Sai 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.

In the last year Sai MicroElectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to CN¥1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sai MicroElectronics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Sai MicroElectronics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.1b of cash and made a loss of CN¥63m. With only CN¥293.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Sai MicroElectronics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Sai MicroElectronics , and understanding them should be part of your investment process.

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.