Chengdu Sino-Microelectronics Tech (SHSE:688709) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Chengdu Sino-Microelectronics Tech. Co., Ltd. (SHSE:688709) does use debt in its business. 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 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chengdu Sino-Microelectronics Tech

What Is Chengdu Sino-Microelectronics Tech's Debt?

As you can see below, Chengdu Sino-Microelectronics Tech had CN¥313.0m of debt at September 2024, down from CN¥712.7m a year prior. But it also has CN¥1.01b in cash to offset that, meaning it has CN¥701.2m net cash.

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

Zooming in on the latest balance sheet data, we can see that Chengdu Sino-Microelectronics Tech had liabilities of CN¥584.4m due within 12 months and liabilities of CN¥75.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.01b as well as receivables valued at CN¥1.17b due within 12 months. So it actually has CN¥1.53b more liquid assets than total liabilities.

This surplus suggests that Chengdu Sino-Microelectronics Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Chengdu Sino-Microelectronics Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Chengdu Sino-Microelectronics Tech's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chengdu Sino-Microelectronics Tech 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. During the last three years, Chengdu Sino-Microelectronics Tech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far 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¥701.2m, as well as more liquid assets than liabilities. So while Chengdu Sino-Microelectronics Tech does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Chengdu Sino-Microelectronics Tech has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.