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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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 A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out 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¥250.0m in debt in September 2024; about the same as the year before. However, it does have CN¥7.53b in cash offsetting this, leading to net cash of CN¥7.28b.

A Look At Advanced Micro-Fabrication Equipment China's Liabilities

According to the last reported balance sheet, Advanced Micro-Fabrication Equipment China had liabilities of CN¥6.14b due within 12 months, and liabilities of CN¥393.4m due beyond 12 months. Offsetting this, it had CN¥7.53b in cash and CN¥1.44b in receivables that were due within 12 months. So it actually has CN¥2.44b more liquid assets than total liabilities.

This state of affairs indicates that Advanced Micro-Fabrication Equipment China's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥128.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Advanced Micro-Fabrication Equipment China has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Advanced Micro-Fabrication Equipment China has increased its EBIT by 8.7% over twelve months, which should ease any concerns about debt repayment. 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 Advanced Micro-Fabrication Equipment China'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Advanced Micro-Fabrication Equipment China burned a lot of cash. 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¥7.28b, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.7% over the last year. So we don't have any problem with Advanced Micro-Fabrication Equipment China's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Advanced Micro-Fabrication Equipment China (1 is significant) you should be aware of.

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.