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.' 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 New Vision Microelectronics Co., Ltd (SHSE:688593) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai New Vision Microelectronics's Debt?

The image below, which you can click on for greater detail, shows that Shanghai New Vision Microelectronics had debt of CN¥20.0m at the end of March 2024, a reduction from CN¥22.6m over a year. However, its balance sheet shows it holds CN¥941.8m in cash, so it actually has CN¥921.8m net cash.

A Look At Shanghai New Vision Microelectronics' Liabilities

We can see from the most recent balance sheet that Shanghai New Vision Microelectronics had liabilities of CN¥138.8m falling due within a year, and liabilities of CN¥1.89m due beyond that. Offsetting these obligations, it had cash of CN¥941.8m as well as receivables valued at CN¥150.5m due within 12 months. So it can boast CN¥951.6m more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai New Vision Microelectronics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai New Vision Microelectronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shanghai New Vision Microelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥483m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shanghai New Vision Microelectronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shanghai New Vision Microelectronics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥174m and booked a CN¥4.0m accounting loss. Given it only has net cash of CN¥921.8m, 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 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 New Vision Microelectronics's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.