Anji Microelectronics Technology (Shanghai) (SHSE:688019) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Anji Microelectronics Technology (Shanghai) Co., Ltd. (SHSE:688019) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Anji Microelectronics Technology (Shanghai)

How Much Debt Does Anji Microelectronics Technology (Shanghai) Carry?

As you can see below, at the end of June 2024, Anji Microelectronics Technology (Shanghai) had CN¥163.4m of debt, up from CN¥69.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥680.2m in cash, so it actually has CN¥516.8m net cash.

How Healthy Is Anji Microelectronics Technology (Shanghai)'s Balance Sheet?

According to the last reported balance sheet, Anji Microelectronics Technology (Shanghai) had liabilities of CN¥334.5m due within 12 months, and liabilities of CN¥316.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥680.2m as well as receivables valued at CN¥351.8m due within 12 months. So it actually has CN¥380.7m more liquid assets than total liabilities.

This surplus suggests that Anji Microelectronics Technology (Shanghai) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Anji Microelectronics Technology (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Anji Microelectronics Technology (Shanghai) if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Anji Microelectronics Technology (Shanghai) can strengthen its balance sheet over time. 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. Anji Microelectronics Technology (Shanghai) 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, Anji Microelectronics Technology (Shanghai) barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anji Microelectronics Technology (Shanghai) has CN¥516.8m in net cash and a decent-looking balance sheet. So we are not troubled with Anji Microelectronics Technology (Shanghai)'s debt use. 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. Case in point: We've spotted 2 warning signs for Anji Microelectronics Technology (Shanghai) you should be aware of, and 1 of them is significant.

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.