Here's Why China Resources Microelectronics (SHSE:688396) Has A Meaningful Debt Burden

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 China Resources Microelectronics Limited (SHSE:688396) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Resources Microelectronics

What Is China Resources Microelectronics's Debt?

You can click the graphic below for the historical numbers, but it shows that China Resources Microelectronics had CN¥498.2m of debt in September 2024, down from CN¥2.04b, one year before. However, it does have CN¥8.63b in cash offsetting this, leading to net cash of CN¥8.13b.

A Look At China Resources Microelectronics' Liabilities

The latest balance sheet data shows that China Resources Microelectronics had liabilities of CN¥4.66b due within a year, and liabilities of CN¥427.5m falling due after that. Offsetting this, it had CN¥8.63b in cash and CN¥2.51b in receivables that were due within 12 months. So it actually has CN¥6.06b more liquid assets than total liabilities.

This short term liquidity is a sign that China Resources Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Resources Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that China Resources Microelectronics's load is not too heavy, because its EBIT was down 42% over the last year. 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 it is future earnings, more than anything, that will determine China Resources Microelectronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Resources Microelectronics 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. Over the last three years, China Resources Microelectronics saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Resources Microelectronics has net cash of CN¥8.13b, as well as more liquid assets than liabilities. So while China Resources Microelectronics does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - China Resources Microelectronics has 1 warning sign we think you should be aware of.

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.