Here's Why Jiangyin Jianghua Microelectronics Materials (SHSE:603078) Can Manage Its Debt Responsibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jiangyin Jianghua Microelectronics Materials Co., Ltd (SHSE:603078) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangyin Jianghua Microelectronics Materials

What Is Jiangyin Jianghua Microelectronics Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangyin Jianghua Microelectronics Materials had CN¥615.2m of debt, an increase on CN¥280.3m, over one year. But on the other hand it also has CN¥735.2m in cash, leading to a CN¥120.0m net cash position.

How Strong Is Jiangyin Jianghua Microelectronics Materials' Balance Sheet?

We can see from the most recent balance sheet that Jiangyin Jianghua Microelectronics Materials had liabilities of CN¥524.8m falling due within a year, and liabilities of CN¥307.4m due beyond that. On the other hand, it had cash of CN¥735.2m and CN¥442.5m worth of receivables due within a year. So it actually has CN¥345.5m 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!

On the other hand, Jiangyin Jianghua Microelectronics Materials's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangyin Jianghua Microelectronics Materials has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jiangyin Jianghua Microelectronics Materials saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥120.0m, as well as more liquid assets than liabilities. So we don't have any problem with Jiangyin Jianghua Microelectronics Materials's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangyin Jianghua Microelectronics Materials's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.