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

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Bright Power Semiconductor's Net Debt?

As you can see below, Shanghai Bright Power Semiconductor had CN¥515.3m of debt at September 2023, down from CN¥593.3m a year prior. However, because it has a cash reserve of CN¥331.2m, its net debt is less, at about CN¥184.1m.

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

We can see from the most recent balance sheet that Shanghai Bright Power Semiconductor had liabilities of CN¥690.8m falling due within a year, and liabilities of CN¥221.0m due beyond that. Offsetting these obligations, it had cash of CN¥331.2m as well as receivables valued at CN¥311.8m due within 12 months. So its liabilities total CN¥268.8m more than the combination of its cash and short-term receivables.

Since publicly traded Shanghai Bright Power Semiconductor shares are worth a total of CN¥5.21b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Bright Power Semiconductor'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 Shanghai Bright Power Semiconductor wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥1.3b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Shanghai Bright Power Semiconductor managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥67m. 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. For example, we would not want to see a repeat of last year's loss of CN¥89m. So we do think this stock is quite risky. 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. Case in point: We've spotted 1 warning sign for Shanghai Bright Power Semiconductor you should be aware of.

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.