Is China Resources Microelectronics (SHSE:688396) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies China Resources Microelectronics Limited (SHSE:688396) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for China Resources Microelectronics

How Much Debt Does China Resources Microelectronics Carry?

The image below, which you can click on for greater detail, shows that at September 2023 China Resources Microelectronics had debt of CN¥2.04b, up from CN¥995.0m in one year. However, it does have CN¥11.4b in cash offsetting this, leading to net cash of CN¥9.37b.

A Look At China Resources Microelectronics' Liabilities

According to the last reported balance sheet, China Resources Microelectronics had liabilities of CN¥5.33b due within 12 months, and liabilities of CN¥1.36b due beyond 12 months. On the other hand, it had cash of CN¥11.4b and CN¥2.36b worth of receivables due within a year. So it can boast CN¥7.07b more liquid assets than total liabilities.

This surplus suggests that China Resources Microelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 44% 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 ultimately the future profitability of the business will decide if China Resources Microelectronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 reported free cash flow worth 5.7% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

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¥9.37b, as well as more liquid assets than liabilities. So we are not troubled with China Resources Microelectronics's debt use. 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 2 warning signs for China Resources Microelectronics (1 is concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.