We Think China Wafer Level CSP (SHSE:603005) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, China Wafer Level CSP Co., Ltd. (SHSE:603005) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 China Wafer Level CSP had CN¥30.5m of debt in September 2024, down from CN¥413.3m, one year before. However, it does have CN¥2.42b in cash offsetting this, leading to net cash of CN¥2.39b.

A Look At China Wafer Level CSP's Liabilities

Zooming in on the latest balance sheet data, we can see that China Wafer Level CSP had liabilities of CN¥325.3m due within 12 months and liabilities of CN¥92.9m due beyond that. Offsetting these obligations, it had cash of CN¥2.42b as well as receivables valued at CN¥137.8m due within 12 months. So it can boast CN¥2.14b more liquid assets than total liabilities.

This surplus suggests that China Wafer Level CSP has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Wafer Level CSP boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that China Wafer Level CSP grew its EBIT by 199% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Wafer Level CSP 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. Happily for any shareholders, China Wafer Level CSP actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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¥2.39b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥168m, being 130% of its EBIT. So is China Wafer Level CSP's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Wafer Level CSP's earnings per share history for free.

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.