Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 BOE HC SemiTek Corporation (SZSE:300323) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 BOE HC SemiTek's Net Debt?

As you can see below, at the end of September 2024, BOE HC SemiTek had CN¥3.15b of debt, up from CN¥2.59b a year ago. Click the image for more detail. On the flip side, it has CN¥1.16b in cash leading to net debt of about CN¥2.00b.

A Look At BOE HC SemiTek's Liabilities

According to the last reported balance sheet, BOE HC SemiTek had liabilities of CN¥3.22b due within 12 months, and liabilities of CN¥1.66b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.16b as well as receivables valued at CN¥1.39b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.33b.

While this might seem like a lot, it is not so bad since BOE HC SemiTek has a market capitalization of CN¥10.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is BOE HC SemiTek's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, BOE HC SemiTek reported revenue of CN¥3.9b, which is a gain of 50%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, BOE HC SemiTek still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥930m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.8b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 3 warning signs for BOE HC SemiTek (2 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.