David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shenzhen Sunmoon Microelectronics Co., Ltd (SHSE:688699) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Shenzhen Sunmoon Microelectronics's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Sunmoon Microelectronics had debt of CN¥44.1m, up from CN¥4.51m in one year. But on the other hand it also has CN¥214.7m in cash, leading to a CN¥170.6m net cash position.

How Healthy Is Shenzhen Sunmoon Microelectronics' Balance Sheet?

The latest balance sheet data shows that Shenzhen Sunmoon Microelectronics had liabilities of CN¥200.2m due within a year, and liabilities of CN¥49.3m falling due after that. Offsetting this, it had CN¥214.7m in cash and CN¥270.5m in receivables that were due within 12 months. So it can boast CN¥235.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Sunmoon Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Sunmoon Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Sunmoon Microelectronics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Sunmoon Microelectronics had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥582m. We would much prefer see growth.

So How Risky Is Shenzhen Sunmoon Microelectronics?

Although Shenzhen Sunmoon Microelectronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥3.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shenzhen Sunmoon Microelectronics (1 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.