Does Anji Microelectronics Technology (Shanghai) (SHSE:688019) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Anji Microelectronics Technology (Shanghai) Co., Ltd. (SHSE:688019) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Anji Microelectronics Technology (Shanghai)

What Is Anji Microelectronics Technology (Shanghai)'s Debt?

As you can see below, at the end of September 2024, Anji Microelectronics Technology (Shanghai) had CN¥239.9m of debt, up from CN¥93.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥809.1m in cash, so it actually has CN¥569.2m 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¥343.7m due within 12 months, and liabilities of CN¥329.0m due beyond 12 months. On the other hand, it had cash of CN¥809.1m and CN¥406.9m worth of receivables due within a year. So it actually has CN¥543.3m 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.

On the other hand, Anji Microelectronics Technology (Shanghai) saw its EBIT drop by 3.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Anji Microelectronics Technology (Shanghai) 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. Over the last three years, Anji Microelectronics Technology (Shanghai) reported free cash flow worth 8.5% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anji Microelectronics Technology (Shanghai) has CN¥569.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Anji Microelectronics Technology (Shanghai)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Anji Microelectronics Technology (Shanghai) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.