Chengdu Sino-Microelectronics Tech (SHSE:688709) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Chengdu Sino-Microelectronics Tech. Co., Ltd. (SHSE:688709) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chengdu Sino-Microelectronics Tech

What Is Chengdu Sino-Microelectronics Tech's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Chengdu Sino-Microelectronics Tech had debt of CN¥689.6m, up from CN¥578.9m in one year. But it also has CN¥1.58b in cash to offset that, meaning it has CN¥889.1m net cash.

How Strong Is Chengdu Sino-Microelectronics Tech's Balance Sheet?

The latest balance sheet data shows that Chengdu Sino-Microelectronics Tech had liabilities of CN¥690.9m due within a year, and liabilities of CN¥294.7m falling due after that. Offsetting this, it had CN¥1.58b in cash and CN¥1.17b in receivables that were due within 12 months. So it actually has CN¥1.76b more liquid assets than total liabilities.

It's good to see that Chengdu Sino-Microelectronics Tech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chengdu Sino-Microelectronics Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Chengdu Sino-Microelectronics Tech's EBIT dived 20%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chengdu Sino-Microelectronics Tech 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, a company can only pay off debt with cold hard cash, not accounting profits. Chengdu Sino-Microelectronics Tech 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, Chengdu Sino-Microelectronics Tech burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chengdu Sino-Microelectronics Tech has net cash of CN¥889.1m, as well as more liquid assets than liabilities. So we don't have any problem with Chengdu Sino-Microelectronics Tech's use of debt. 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 - Chengdu Sino-Microelectronics Tech has 1 warning sign we think you should be aware of.

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.