Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that MEMSensing Microsystems (Suzhou, China) Co., Ltd. (SHSE:688286) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does MEMSensing Microsystems (Suzhou China) Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 MEMSensing Microsystems (Suzhou China) had CN¥42.3m of debt, an increase on CN¥19.6m, over one year. But on the other hand it also has CN¥237.9m in cash, leading to a CN¥195.6m net cash position.
A Look At MEMSensing Microsystems (Suzhou China)'s Liabilities
We can see from the most recent balance sheet that MEMSensing Microsystems (Suzhou China) had liabilities of CN¥120.8m falling due within a year, and liabilities of CN¥55.8m due beyond that. Offsetting this, it had CN¥237.9m in cash and CN¥71.0m in receivables that were due within 12 months. So it actually has CN¥132.4m more liquid assets than total liabilities.
This surplus suggests that MEMSensing Microsystems (Suzhou China) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MEMSensing Microsystems (Suzhou China) boasts net cash, 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 future earnings, more than anything, that will determine MEMSensing Microsystems (Suzhou China)'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.
Over 12 months, MEMSensing Microsystems (Suzhou China) reported revenue of CN¥450m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is MEMSensing Microsystems (Suzhou China)?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year MEMSensing Microsystems (Suzhou China) had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥155m and booked a CN¥68m accounting loss. However, it has net cash of CN¥195.6m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, MEMSensing Microsystems (Suzhou China) may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 2 warning signs for MEMSensing Microsystems (Suzhou China) that you should be aware of.
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.
