Is Wuxi ETEK MicroelectronicsLtd (SHSE:688601) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Wuxi ETEK Microelectronics Co.,Ltd. (SHSE:688601) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wuxi ETEK MicroelectronicsLtd

How Much Debt Does Wuxi ETEK MicroelectronicsLtd Carry?

As you can see below, at the end of September 2024, Wuxi ETEK MicroelectronicsLtd had CN¥12.0m of debt, up from CN¥10.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥848.0m in cash, leading to a CN¥836.0m net cash position.

How Healthy Is Wuxi ETEK MicroelectronicsLtd's Balance Sheet?

According to the last reported balance sheet, Wuxi ETEK MicroelectronicsLtd had liabilities of CN¥98.6m due within 12 months, and liabilities of CN¥7.09m due beyond 12 months. Offsetting these obligations, it had cash of CN¥848.0m as well as receivables valued at CN¥218.5m due within 12 months. So it actually has CN¥960.7m more liquid assets than total liabilities.

This surplus suggests that Wuxi ETEK MicroelectronicsLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Wuxi ETEK MicroelectronicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Wuxi ETEK MicroelectronicsLtd has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wuxi ETEK MicroelectronicsLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wuxi ETEK MicroelectronicsLtd 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, Wuxi ETEK MicroelectronicsLtd recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually 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 Wuxi ETEK MicroelectronicsLtd has net cash of CN¥836.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥177m. The bottom line is that we do not find Wuxi ETEK MicroelectronicsLtd's debt levels at all concerning. Over time, share prices tend to follow earnings per share, so if you're interested in Wuxi ETEK MicroelectronicsLtd, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.