Jiangyin Jianghua Microelectronics Materials (SHSE:603078) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Jiangyin Jianghua Microelectronics Materials Co., Ltd (SHSE:603078) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Jiangyin Jianghua Microelectronics Materials

How Much Debt Does Jiangyin Jianghua Microelectronics Materials Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangyin Jianghua Microelectronics Materials had debt of CN¥615.2m, up from CN¥280.3m in one year. However, its balance sheet shows it holds CN¥735.2m in cash, so it actually has CN¥120.0m net cash.

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 can boast 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. Simply put, the fact that Jiangyin Jianghua Microelectronics Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Jiangyin Jianghua Microelectronics Materials has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 it is always sensible to investigate a company's debt, in this case Jiangyin Jianghua Microelectronics Materials has CN¥120.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Jiangyin Jianghua Microelectronics Materials's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Jiangyin Jianghua Microelectronics Materials, you may well want to click here to check an interactive graph of its earnings per share history.

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.