Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that StarPower Semiconductor Ltd. (SHSE:603290) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does StarPower Semiconductor Carry?

The image below, which you can click on for greater detail, shows that at March 2024 StarPower Semiconductor had debt of CN¥1.10b, up from CN¥882.7m in one year. However, it does have CN¥1.13b in cash offsetting this, leading to net cash of CN¥26.6m.

A Look At StarPower Semiconductor's Liabilities

The latest balance sheet data shows that StarPower Semiconductor had liabilities of CN¥783.9m due within a year, and liabilities of CN¥1.37b falling due after that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥1.41b due within 12 months. So it can boast CN¥380.0m more liquid assets than total liabilities.

This state of affairs indicates that StarPower Semiconductor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥21.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that StarPower Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that StarPower Semiconductor grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine StarPower Semiconductor'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. StarPower Semiconductor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, StarPower Semiconductor burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that StarPower Semiconductor has net cash of CN¥26.6m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we don't have any problem with StarPower Semiconductor's use of debt. 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. Case in point: We've spotted 2 warning signs for StarPower Semiconductor you should be aware of, and 1 of them is significant.

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.