Does Tangshan Sunfar Silicon IndustriesLtd (SHSE:603938) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Tangshan Sunfar Silicon Industries Co.,Ltd. (SHSE:603938) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tangshan Sunfar Silicon IndustriesLtd

How Much Debt Does Tangshan Sunfar Silicon IndustriesLtd Carry?

As you can see below, Tangshan Sunfar Silicon IndustriesLtd had CN¥294.7m of debt at June 2024, down from CN¥396.0m a year prior. But on the other hand it also has CN¥670.5m in cash, leading to a CN¥375.7m net cash position.

How Healthy Is Tangshan Sunfar Silicon IndustriesLtd's Balance Sheet?

We can see from the most recent balance sheet that Tangshan Sunfar Silicon IndustriesLtd had liabilities of CN¥510.4m falling due within a year, and liabilities of CN¥290.3m due beyond that. On the other hand, it had cash of CN¥670.5m and CN¥462.9m worth of receivables due within a year. So it can boast CN¥332.7m more liquid assets than total liabilities.

This surplus suggests that Tangshan Sunfar Silicon IndustriesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

It is just as well that Tangshan Sunfar Silicon IndustriesLtd's load is not too heavy, because its EBIT was down 90% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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 company can only pay off debt with cold hard cash, not accounting profits. 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's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tangshan Sunfar Silicon IndustriesLtd has CN¥375.7m in net cash and a decent-looking balance sheet. So we are not troubled with Tangshan Sunfar Silicon IndustriesLtd's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tangshan Sunfar Silicon IndustriesLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.