Is Beijing YanDong MicroElectronic (SHSE:688172) Using Too Much Debt?

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 Beijing YanDong MicroElectronic Co., Ltd. (SHSE:688172) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Beijing YanDong MicroElectronic

How Much Debt Does Beijing YanDong MicroElectronic Carry?

As you can see below, Beijing YanDong MicroElectronic had CN¥1.09b of debt at March 2024, down from CN¥1.17b a year prior. However, its balance sheet shows it holds CN¥6.43b in cash, so it actually has CN¥5.34b net cash.

How Healthy Is Beijing YanDong MicroElectronic's Balance Sheet?

We can see from the most recent balance sheet that Beijing YanDong MicroElectronic had liabilities of CN¥1.65b falling due within a year, and liabilities of CN¥1.45b due beyond that. On the other hand, it had cash of CN¥6.43b and CN¥1.74b worth of receivables due within a year. So it actually has CN¥5.06b more liquid assets than total liabilities.

It's good to see that Beijing YanDong MicroElectronic has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Beijing YanDong MicroElectronic boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Beijing YanDong MicroElectronic's saving grace is its low debt levels, because its EBIT has tanked 85% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing YanDong MicroElectronic can strengthen its balance sheet over time. 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. Beijing YanDong MicroElectronic 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. During the last three years, Beijing YanDong MicroElectronic 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 it is always sensible to investigate a company's debt, in this case Beijing YanDong MicroElectronic has CN¥5.34b in net cash and a decent-looking balance sheet. So we don't have any problem with Beijing YanDong MicroElectronic's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Beijing YanDong MicroElectronic you should know about.

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.