Is Anji Microelectronics Technology (Shanghai) (SHSE:688019) A Risky Investment?

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.' 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 can see that Anji Microelectronics Technology (Shanghai) Co., Ltd. (SHSE:688019) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Anji Microelectronics Technology (Shanghai)

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

The image below, which you can click on for greater detail, shows that at March 2024 Anji Microelectronics Technology (Shanghai) had debt of CN¥137.8m, up from CN¥84.7m in one year. However, it does have CN¥608.6m in cash offsetting this, leading to net cash of CN¥470.8m.

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

Zooming in on the latest balance sheet data, we can see that Anji Microelectronics Technology (Shanghai) had liabilities of CN¥204.0m due within 12 months and liabilities of CN¥280.4m due beyond that. On the other hand, it had cash of CN¥608.6m and CN¥312.7m worth of receivables due within a year. So it can boast CN¥437.0m 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 good news is that Anji Microelectronics Technology (Shanghai) has increased its EBIT by 4.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Anji Microelectronics Technology (Shanghai)'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, a company can only pay off debt with cold hard cash, not accounting profits. 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) recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anji Microelectronics Technology (Shanghai) has net cash of CN¥470.8m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 4.3% in the last twelve months. So we are not troubled with Anji Microelectronics Technology (Shanghai)'s debt use. 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 example, we've discovered 1 warning sign for Anji Microelectronics Technology (Shanghai) that you should be aware of before investing here.

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.

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