Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Aurora Optoelectronics Co.,Ltd. (SHSE:600666) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Aurora OptoelectronicsLtd's Net Debt?

As you can see below, at the end of June 2024, Aurora OptoelectronicsLtd had CN¥32.2m of debt, up from CN¥13.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥266.0m in cash, leading to a CN¥233.8m net cash position.

A Look At Aurora OptoelectronicsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Aurora OptoelectronicsLtd had liabilities of CN¥441.8m due within 12 months and liabilities of CN¥690.1m due beyond that. Offsetting these obligations, it had cash of CN¥266.0m as well as receivables valued at CN¥336.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥529.6m.

Given Aurora OptoelectronicsLtd has a market capitalization of CN¥4.75b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aurora OptoelectronicsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Aurora OptoelectronicsLtd'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, Aurora OptoelectronicsLtd reported revenue of CN¥402m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Aurora OptoelectronicsLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Aurora OptoelectronicsLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥793m of cash and made a loss of CN¥620m. With only CN¥233.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with Aurora OptoelectronicsLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.