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.' 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. As with many other companies Shanghai New Vision Microelectronics Co., Ltd (SHSE:688593) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shanghai New Vision Microelectronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shanghai New Vision Microelectronics had CN¥77.3m of debt, an increase on CN¥20.0m, over one year. But it also has CN¥985.2m in cash to offset that, meaning it has CN¥908.0m net cash.

How Healthy Is Shanghai New Vision Microelectronics' Balance Sheet?

The latest balance sheet data shows that Shanghai New Vision Microelectronics had liabilities of CN¥228.8m due within a year, and liabilities of CN¥1.61m falling due after that. Offsetting these obligations, it had cash of CN¥985.2m as well as receivables valued at CN¥164.5m due within 12 months. So it actually has CN¥919.3m more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai New Vision Microelectronics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shanghai New Vision 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 Shanghai New Vision Microelectronics'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.

In the last year Shanghai New Vision Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to CN¥492m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shanghai New Vision Microelectronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Shanghai New Vision Microelectronics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥231m of cash and made a loss of CN¥11m. Given it only has net cash of CN¥908.0m, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Shanghai New Vision Microelectronics 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.