Is Beijing YanDong MicroElectronic (SHSE:688172) 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. As with many other companies Beijing YanDong MicroElectronic Co., Ltd. (SHSE:688172) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing YanDong MicroElectronic

What Is Beijing YanDong MicroElectronic's Debt?

As you can see below, at the end of September 2024, Beijing YanDong MicroElectronic had CN¥1.07b of debt, up from CN¥989.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.75b in cash, so it actually has CN¥4.68b net cash.

How Healthy Is Beijing YanDong MicroElectronic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing YanDong MicroElectronic had liabilities of CN¥1.94b due within 12 months and liabilities of CN¥1.60b due beyond that. Offsetting these obligations, it had cash of CN¥5.75b as well as receivables valued at CN¥1.50b due within 12 months. So it can boast CN¥3.72b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing YanDong MicroElectronic could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing YanDong MicroElectronic has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Beijing YanDong MicroElectronic'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.

Over 12 months, Beijing YanDong MicroElectronic made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 19%. We would much prefer see growth.

So How Risky Is Beijing YanDong MicroElectronic?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Beijing YanDong MicroElectronic lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.2b of cash and made a loss of CN¥18m. Given it only has net cash of CN¥4.68b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.