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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zhuhai Aerospace Microchips Science & Technology Co., Ltd. (SZSE:300053) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zhuhai Aerospace Microchips Science & Technology's Net Debt?

As you can see below, at the end of September 2024, Zhuhai Aerospace Microchips Science & Technology had CN¥221.7m of debt, up from CN¥159.9m a year ago. Click the image for more detail. On the flip side, it has CN¥207.8m in cash leading to net debt of about CN¥13.9m.

How Healthy Is Zhuhai Aerospace Microchips Science & Technology's Balance Sheet?

We can see from the most recent balance sheet that Zhuhai Aerospace Microchips Science & Technology had liabilities of CN¥588.7m falling due within a year, and liabilities of CN¥74.1m due beyond that. On the other hand, it had cash of CN¥207.8m and CN¥683.3m worth of receivables due within a year. So it can boast CN¥228.2m more liquid assets than total liabilities.

This state of affairs indicates that Zhuhai Aerospace Microchips Science & Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥12.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Zhuhai Aerospace Microchips Science & Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhuhai Aerospace Microchips Science & Technology'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 Zhuhai Aerospace Microchips Science & Technology had a loss before interest and tax, and actually shrunk its revenue by 34%, to CN¥250m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Zhuhai Aerospace Microchips Science & Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥329m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Zhuhai Aerospace Microchips Science & Technology 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.