These 4 Measures Indicate That Anji Microelectronics Technology (Shanghai) (SHSE:688019) Is Using Debt Reasonably Well

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. As with many other companies Anji Microelectronics Technology (Shanghai) Co., Ltd. (SHSE:688019) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See 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 2023, Anji Microelectronics Technology (Shanghai) had CN¥174.9m of debt, up from CN¥60.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥567.5m in cash, leading to a CN¥392.6m net cash position.

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¥170.8m due within 12 months, and liabilities of CN¥238.3m due beyond 12 months. On the other hand, it had cash of CN¥567.5m and CN¥276.7m worth of receivables due within a year. So it actually has CN¥435.0m 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. Succinctly put, Anji Microelectronics Technology (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Anji Microelectronics Technology (Shanghai) has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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 Anji Microelectronics Technology (Shanghai)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Considering the last three years, Anji Microelectronics Technology (Shanghai) actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥392.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 41% year-on-year EBIT growth. So we don't have any problem with Anji Microelectronics Technology (Shanghai)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Anji Microelectronics Technology (Shanghai) is showing 1 warning sign in our investment analysis , 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.