Advanced Micro-Fabrication Equipment China (SHSE:688012) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Advanced Micro-Fabrication Equipment China

What Is Advanced Micro-Fabrication Equipment China's Net Debt?

The chart below, which you can click on for greater detail, shows that Advanced Micro-Fabrication Equipment China had CN¥500.2m in debt in June 2024; about the same as the year before. But on the other hand it also has CN¥8.14b in cash, leading to a CN¥7.64b net cash position.

How Healthy Is Advanced Micro-Fabrication Equipment China's Balance Sheet?

The latest balance sheet data shows that Advanced Micro-Fabrication Equipment China had liabilities of CN¥5.76b due within a year, and liabilities of CN¥310.2m falling due after that. Offsetting this, it had CN¥8.14b in cash and CN¥1.55b in receivables that were due within 12 months. So it actually has CN¥3.62b more liquid assets than total liabilities.

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

Fortunately, Advanced Micro-Fabrication Equipment China grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Advanced Micro-Fabrication Equipment China 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Advanced Micro-Fabrication Equipment China 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. Over the last three years, Advanced Micro-Fabrication Equipment China saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Advanced Micro-Fabrication Equipment China has net cash of CN¥7.64b, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.9% over the last year. So we are not troubled with Advanced Micro-Fabrication Equipment China's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Advanced Micro-Fabrication Equipment China has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.