Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that National Silicon Industry Group Co.,Ltd. (SHSE:688126) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does National Silicon Industry GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 National Silicon Industry GroupLtd had debt of CN¥6.02b, up from CN¥3.16b in one year. However, it does have CN¥6.31b in cash offsetting this, leading to net cash of CN¥288.5m.

How Healthy Is National Silicon Industry GroupLtd's Balance Sheet?

The latest balance sheet data shows that National Silicon Industry GroupLtd had liabilities of CN¥3.96b due within a year, and liabilities of CN¥5.59b falling due after that. Offsetting this, it had CN¥6.31b in cash and CN¥1.07b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.17b more than its cash and near-term receivables, combined.

Of course, National Silicon Industry GroupLtd has a market capitalization of CN¥59.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, National Silicon Industry GroupLtd also has more cash than debt, so we're pretty confident 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 National Silicon Industry GroupLtd 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 National Silicon Industry GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to CN¥3.3b. That's not what we would hope to see.

So How Risky Is National Silicon Industry GroupLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year National Silicon Industry GroupLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥4.8b of cash and made a loss of CN¥562m. Given it only has net cash of CN¥288.5m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that National Silicon Industry GroupLtd is showing 1 warning sign in our investment analysis , you should know about...

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.