Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Tangshan Sunfar Silicon Industries Co.,Ltd. (SHSE:603938) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Tangshan Sunfar Silicon IndustriesLtd
What Is Tangshan Sunfar Silicon IndustriesLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that Tangshan Sunfar Silicon IndustriesLtd had CN¥369.6m of debt in September 2023, down from CN¥412.9m, one year before. But it also has CN¥741.2m in cash to offset that, meaning it has CN¥371.6m net cash.
How Healthy Is Tangshan Sunfar Silicon IndustriesLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tangshan Sunfar Silicon IndustriesLtd had liabilities of CN¥506.3m due within 12 months and liabilities of CN¥349.2m due beyond that. On the other hand, it had cash of CN¥741.2m and CN¥567.2m worth of receivables due within a year. So it actually has CN¥452.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Tangshan Sunfar Silicon IndustriesLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tangshan Sunfar Silicon IndustriesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Tangshan Sunfar Silicon IndustriesLtd if management cannot prevent a repeat of the 55% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tangshan Sunfar Silicon IndustriesLtd'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tangshan Sunfar Silicon IndustriesLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Tangshan Sunfar Silicon IndustriesLtd created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Tangshan Sunfar Silicon IndustriesLtd has CN¥371.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Tangshan Sunfar Silicon IndustriesLtd's use of debt. 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 3 warning signs for Tangshan Sunfar Silicon IndustriesLtd 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.