Is Wafer Works (Shanghai) (SHSE:688584) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Wafer Works (Shanghai) Co., Ltd. (SHSE:688584) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wafer Works (Shanghai)

What Is Wafer Works (Shanghai)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wafer Works (Shanghai) had CN¥186.2m of debt in September 2024, down from CN¥603.2m, one year before. However, it does have CN¥1.32b in cash offsetting this, leading to net cash of CN¥1.13b.

How Healthy Is Wafer Works (Shanghai)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wafer Works (Shanghai) had liabilities of CN¥324.5m due within 12 months and liabilities of CN¥132.6m due beyond that. On the other hand, it had cash of CN¥1.32b and CN¥245.5m worth of receivables due within a year. So it can boast CN¥1.11b more liquid assets than total liabilities.

This surplus suggests that Wafer Works (Shanghai) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Wafer Works (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Wafer Works (Shanghai)'s load is not too heavy, because its EBIT was down 71% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wafer Works (Shanghai) will need earnings to service that debt. 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. Wafer Works (Shanghai) 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. During the last three years, Wafer Works (Shanghai) generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wafer Works (Shanghai) has net cash of CN¥1.13b, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in CN¥121m. So we are not troubled with Wafer Works (Shanghai)'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 example, we've discovered 4 warning signs for Wafer Works (Shanghai) (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.