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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ACM Research (Shanghai), Inc. (SHSE:688082) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ACM Research (Shanghai)

What Is ACM Research (Shanghai)'s Net Debt?

As you can see below, at the end of September 2024, ACM Research (Shanghai) had CN¥1.11b of debt, up from CN¥597.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.15b in cash, leading to a CN¥1.04b net cash position.

A Look At ACM Research (Shanghai)'s Liabilities

The latest balance sheet data shows that ACM Research (Shanghai) had liabilities of CN¥3.40b due within a year, and liabilities of CN¥779.4m falling due after that. Offsetting these obligations, it had cash of CN¥2.15b as well as receivables valued at CN¥2.15b due within 12 months. So it actually has CN¥112.0m more liquid assets than total liabilities.

This state of affairs indicates that ACM Research (Shanghai)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥43.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ACM Research (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that ACM Research (Shanghai) grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ACM Research (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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, ACM Research (Shanghai) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ACM Research (Shanghai) has net cash of CN¥1.04b, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we are not troubled with ACM Research (Shanghai)'s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with ACM Research (Shanghai) (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.