We Think Hefei Chipmore TechnologyLtd (SHSE:688352) Can Stay On Top Of Its 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.' 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 can see that Hefei Chipmore Technology Co.,Ltd. (SHSE:688352) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hefei Chipmore TechnologyLtd

What Is Hefei Chipmore TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hefei Chipmore TechnologyLtd had CN¥453.9m of debt in March 2024, down from CN¥1.04b, one year before. However, its balance sheet shows it holds CN¥1.96b in cash, so it actually has CN¥1.50b 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¥884.5m due within 12 months, and liabilities of CN¥324.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.96b as well as receivables valued at CN¥168.2m due within 12 months. So it actually has CN¥915.8m more liquid assets than total liabilities.

This surplus suggests that Hefei Chipmore TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

On top of that, Hefei Chipmore TechnologyLtd grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hefei Chipmore TechnologyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. Considering the last three years, Hefei Chipmore TechnologyLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥1.50b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So is Hefei Chipmore TechnologyLtd's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Hefei Chipmore TechnologyLtd that you should be aware of.

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.