Does Quechen Silicon Chemical (SHSE:605183) Have A Healthy Balance Sheet?

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.' 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 can see that Quechen Silicon Chemical Co., Ltd. (SHSE:605183) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Quechen Silicon Chemical

What Is Quechen Silicon Chemical's Debt?

As you can see below, at the end of March 2024, Quechen Silicon Chemical had CN¥61.6m of debt, up from CN¥50.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥730.0m in cash, so it actually has CN¥668.4m net cash.

How Healthy Is Quechen Silicon Chemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Quechen Silicon Chemical had liabilities of CN¥405.5m due within 12 months and liabilities of CN¥221.3k due beyond that. Offsetting this, it had CN¥730.0m in cash and CN¥679.0m in receivables that were due within 12 months. So it can boast CN¥1.00b more liquid assets than total liabilities.

This short term liquidity is a sign that Quechen Silicon Chemical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Quechen Silicon Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Quechen Silicon Chemical has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 Quechen Silicon Chemical's ability to maintain a healthy balance sheet going forward. 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. While Quechen Silicon Chemical 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, Quechen Silicon Chemical recorded free cash flow of 46% 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 Quechen Silicon Chemical has net cash of CN¥668.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Quechen Silicon Chemical's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Quechen Silicon Chemical that you should be aware of.

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.