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.' 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, Jiangyin Jianghua Microelectronics Materials Co., Ltd (SHSE:603078) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Jiangyin Jianghua Microelectronics Materials Carry?
As you can see below, at the end of December 2023, Jiangyin Jianghua Microelectronics Materials had CN¥601.1m of debt, up from CN¥466.8m a year ago. Click the image for more detail. But it also has CN¥845.3m in cash to offset that, meaning it has CN¥244.2m net cash.
A Look At Jiangyin Jianghua Microelectronics Materials' Liabilities
We can see from the most recent balance sheet that Jiangyin Jianghua Microelectronics Materials had liabilities of CN¥523.7m falling due within a year, and liabilities of CN¥308.5m due beyond that. Offsetting these obligations, it had cash of CN¥845.3m as well as receivables valued at CN¥383.7m due within 12 months. So it actually has CN¥396.8m more liquid assets than total liabilities.
This surplus suggests that Jiangyin Jianghua Microelectronics Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangyin Jianghua Microelectronics Materials boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Jiangyin Jianghua Microelectronics Materials if management cannot prevent a repeat of the 25% 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 ultimately the future profitability of the business will decide if Jiangyin Jianghua Microelectronics Materials can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangyin Jianghua Microelectronics Materials 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. During the last three years, Jiangyin Jianghua Microelectronics Materials burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Jiangyin Jianghua Microelectronics Materials has net cash of CN¥244.2m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Jiangyin Jianghua Microelectronics Materials's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangyin Jianghua Microelectronics Materials you should know about.
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.