Is Jiangsu Leadmicro Nano-Equipment Technology (SHSE:688147) Using Too Much Debt?

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.' 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 Jiangsu Leadmicro Nano-Equipment Technology Ltd (SHSE:688147) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Leadmicro Nano-Equipment Technology

What Is Jiangsu Leadmicro Nano-Equipment Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Leadmicro Nano-Equipment Technology had CN¥589.1m of debt, an increase on CN¥292.4m, over one year. But on the other hand it also has CN¥939.6m in cash, leading to a CN¥350.5m net cash position.

A Look At Jiangsu Leadmicro Nano-Equipment Technology's Liabilities

According to the last reported balance sheet, Jiangsu Leadmicro Nano-Equipment Technology had liabilities of CN¥4.48b due within 12 months, and liabilities of CN¥256.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥939.6m as well as receivables valued at CN¥901.7m due within 12 months. So its liabilities total CN¥2.90b more than the combination of its cash and short-term receivables.

Of course, Jiangsu Leadmicro Nano-Equipment Technology has a market capitalization of CN¥17.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jiangsu Leadmicro Nano-Equipment Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Jiangsu Leadmicro Nano-Equipment Technology grew its EBIT by 2,980% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Jiangsu Leadmicro Nano-Equipment Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Leadmicro Nano-Equipment Technology 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, Jiangsu Leadmicro Nano-Equipment Technology produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Jiangsu Leadmicro Nano-Equipment Technology does have more liabilities than liquid assets, it also has net cash of CN¥350.5m. And it impressed us with its EBIT growth of 2,980% over the last year. So we don't think Jiangsu Leadmicro Nano-Equipment Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Jiangsu Leadmicro Nano-Equipment Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.