These 4 Measures Indicate That ACM Research (Shanghai) (SHSE:688082) Is Using Debt Reasonably Well

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.' 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, ACM Research (Shanghai), Inc. (SHSE:688082) 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ACM Research (Shanghai)

How Much Debt Does ACM Research (Shanghai) Carry?

As you can see below, at the end of March 2024, ACM Research (Shanghai) had CN¥728.9m of debt, up from CN¥545.7m a year ago. Click the image for more detail. But it also has CN¥1.55b in cash to offset that, meaning it has CN¥820.2m net cash.

How Strong Is ACM Research (Shanghai)'s Balance Sheet?

We can see from the most recent balance sheet that ACM Research (Shanghai) had liabilities of CN¥3.09b falling due within a year, and liabilities of CN¥416.1m due beyond that. Offsetting this, it had CN¥1.55b in cash and CN¥1.68b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥274.9m.

Having regard to ACM Research (Shanghai)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥34.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, ACM Research (Shanghai) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, ACM Research (Shanghai) grew its EBIT by 3.9% in the last year, making that debt load look even more manageable. 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 ACM Research (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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ACM Research (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, ACM Research (Shanghai) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about ACM Research (Shanghai)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥820.2m. And it also grew its EBIT by 3.9% over the last year. So we don't have any problem with ACM Research (Shanghai)'s use of debt. 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. For instance, we've identified 2 warning signs for ACM Research (Shanghai) (1 is concerning) 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.