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.' 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 Shanghai Bright Power Semiconductor Co., Ltd. (SHSE:688368) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanghai Bright Power Semiconductor

What Is Shanghai Bright Power Semiconductor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Bright Power Semiconductor had CN¥477.6m of debt in September 2023, down from CN¥630.0m, one year before. However, because it has a cash reserve of CN¥331.2m, its net debt is less, at about CN¥146.4m.

How Strong Is Shanghai Bright Power Semiconductor's Balance Sheet?

According to the last reported balance sheet, Shanghai Bright Power Semiconductor had liabilities of CN¥690.8m due within 12 months, and liabilities of CN¥221.0m due beyond 12 months. On the other hand, it had cash of CN¥331.2m and CN¥311.8m worth of receivables due within a year. So its liabilities total CN¥268.8m more than the combination of its cash and short-term receivables.

Given Shanghai Bright Power Semiconductor has a market capitalization of CN¥7.10b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Bright Power Semiconductor 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.

Over 12 months, Shanghai Bright Power Semiconductor made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 7.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shanghai Bright Power Semiconductor produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥115m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥40m into a profit. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shanghai Bright Power Semiconductor's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.