Hefei Chipmore TechnologyLtd (SHSE:688352) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hefei Chipmore Technology Co.,Ltd. (SHSE:688352) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hefei Chipmore TechnologyLtd

How Much Debt Does Hefei Chipmore TechnologyLtd Carry?

As you can see below, Hefei Chipmore TechnologyLtd had CN¥430.7m of debt at September 2024, down from CN¥705.5m a year prior. However, its balance sheet shows it holds CN¥1.54b in cash, so it actually has CN¥1.11b net cash.

How Strong Is Hefei Chipmore TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Hefei Chipmore TechnologyLtd had liabilities of CN¥851.8m due within 12 months, and liabilities of CN¥277.4m due beyond 12 months. Offsetting this, it had CN¥1.54b in cash and CN¥190.1m in receivables that were due within 12 months. So it actually has CN¥601.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Hefei Chipmore TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hefei Chipmore TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Hefei Chipmore TechnologyLtd grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hefei Chipmore TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hefei Chipmore TechnologyLtd 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. Over the last three years, Hefei Chipmore TechnologyLtd saw substantial negative free cash flow, in total. 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 Hefei Chipmore TechnologyLtd has net cash of CN¥1.11b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't have any problem with Hefei Chipmore TechnologyLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hefei Chipmore TechnologyLtd is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.