Is Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Circuit Fabology Microelectronics EquipmentLtd

What Is Circuit Fabology Microelectronics EquipmentLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Circuit Fabology Microelectronics EquipmentLtd had CN¥16.2m of debt, an increase on none, over one year. But on the other hand it also has CN¥787.0m in cash, leading to a CN¥770.8m net cash position.

How Strong Is Circuit Fabology Microelectronics EquipmentLtd's Balance Sheet?

According to the last reported balance sheet, Circuit Fabology Microelectronics EquipmentLtd had liabilities of CN¥570.7m due within 12 months, and liabilities of CN¥70.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥787.0m as well as receivables valued at CN¥964.6m due within 12 months. So it can boast CN¥1.11b more liquid assets than total liabilities.

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

On top of that, Circuit Fabology Microelectronics EquipmentLtd grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. 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 Circuit Fabology Microelectronics EquipmentLtd'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 Circuit Fabology Microelectronics EquipmentLtd 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, Circuit Fabology Microelectronics EquipmentLtd 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 it is always sensible to investigate a company's debt, in this case Circuit Fabology Microelectronics EquipmentLtd has CN¥770.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 47% over the last year. So we are not troubled with Circuit Fabology Microelectronics EquipmentLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Circuit Fabology Microelectronics EquipmentLtd (including 1 which can't be ignored) .

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.