Here's Why Tangshan Sunfar Silicon IndustriesLtd (SHSE:603938) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Tangshan Sunfar Silicon Industries Co.,Ltd. (SHSE:603938) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Tangshan Sunfar Silicon IndustriesLtd

What Is Tangshan Sunfar Silicon IndustriesLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tangshan Sunfar Silicon IndustriesLtd had CN¥294.7m of debt in September 2024, down from CN¥369.6m, one year before. But it also has CN¥747.6m in cash to offset that, meaning it has CN¥452.8m net cash.

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

According to the last reported balance sheet, Tangshan Sunfar Silicon IndustriesLtd had liabilities of CN¥694.6m due within 12 months, and liabilities of CN¥176.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥747.6m as well as receivables valued at CN¥410.6m due within 12 months. So it can boast CN¥287.3m 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 79% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Tangshan Sunfar Silicon IndustriesLtd 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, a company can only pay off debt with cold hard cash, not accounting profits. While Tangshan Sunfar Silicon IndustriesLtd 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. Looking at the most recent three years, Tangshan Sunfar Silicon IndustriesLtd recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tangshan Sunfar Silicon IndustriesLtd has net cash of CN¥452.8m, as well as more liquid assets than liabilities. So we don't have any problem with Tangshan Sunfar Silicon IndustriesLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tangshan Sunfar Silicon IndustriesLtd .

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.