Does China Wafer Level CSP (SHSE:603005) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. Importantly, China Wafer Level CSP Co., Ltd. (SHSE:603005) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

View our latest analysis for China Wafer Level CSP

How Much Debt Does China Wafer Level CSP Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 China Wafer Level CSP had CN¥383.4m of debt, an increase on CN¥316.5m, over one year. But it also has CN¥2.65b in cash to offset that, meaning it has CN¥2.27b net cash.

How Healthy Is China Wafer Level CSP's Balance Sheet?

The latest balance sheet data shows that China Wafer Level CSP had liabilities of CN¥496.4m due within a year, and liabilities of CN¥262.3m falling due after that. Offsetting this, it had CN¥2.65b in cash and CN¥115.5m in receivables that were due within 12 months. So it can boast CN¥2.01b more liquid assets than total liabilities.

This excess liquidity suggests that China Wafer Level CSP is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that China Wafer Level CSP has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, China Wafer Level CSP grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Wafer Level CSP'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 China Wafer Level CSP 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. During the last three years, China Wafer Level CSP generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Wafer Level CSP has net cash of CN¥2.27b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥127m, being 82% of its EBIT. When it comes to China Wafer Level CSP's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Over time, share prices tend to follow earnings per share, so if you're interested in China Wafer Level CSP, you may well want to click here to check an interactive graph of its earnings per share history.

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.