The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Guangzhou Anyka Microelectronics Co., Ltd. (SHSE:688620) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Guangzhou Anyka Microelectronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangzhou Anyka Microelectronics had CN¥130.1m of debt, an increase on CN¥42.3m, over one year. But on the other hand it also has CN¥211.1m in cash, leading to a CN¥81.0m net cash position.

How Healthy Is Guangzhou Anyka Microelectronics' Balance Sheet?

According to the last reported balance sheet, Guangzhou Anyka Microelectronics had liabilities of CN¥226.8m due within 12 months, and liabilities of CN¥9.66m due beyond 12 months. On the other hand, it had cash of CN¥211.1m and CN¥172.1m worth of receivables due within a year. So it actually has CN¥146.7m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Anyka Microelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangzhou Anyka Microelectronics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangzhou Anyka Microelectronics'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.

In the last year Guangzhou Anyka Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to CN¥573m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Guangzhou Anyka Microelectronics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Guangzhou Anyka Microelectronics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥53m and booked a CN¥9.3m accounting loss. With only CN¥81.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Guangzhou Anyka 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.