Does Shanghai Sinyang Semiconductor Materials (SZSE:300236) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shanghai Sinyang Semiconductor Materials Co., Ltd. (SZSE:300236) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai Sinyang Semiconductor Materials

What Is Shanghai Sinyang Semiconductor Materials's Debt?

As you can see below, Shanghai Sinyang Semiconductor Materials had CN¥569.8m of debt at March 2024, down from CN¥742.5m a year prior. But on the other hand it also has CN¥858.8m in cash, leading to a CN¥289.0m net cash position.

How Strong Is Shanghai Sinyang Semiconductor Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Sinyang Semiconductor Materials had liabilities of CN¥659.6m due within 12 months and liabilities of CN¥602.3m due beyond that. On the other hand, it had cash of CN¥858.8m and CN¥764.4m worth of receivables due within a year. So it actually has CN¥361.3m more liquid assets than total liabilities.

This surplus suggests that Shanghai Sinyang Semiconductor Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Sinyang Semiconductor Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

One way Shanghai Sinyang Semiconductor Materials could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 15%, as it did over the last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanghai Sinyang Semiconductor Materials can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Sinyang Semiconductor Materials 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 two years, Shanghai Sinyang Semiconductor Materials saw substantial negative free cash flow, in total. 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 it is always sensible to investigate a company's debt, in this case Shanghai Sinyang Semiconductor Materials has CN¥289.0m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 15% in the last twelve months. So we are not troubled with Shanghai Sinyang Semiconductor Materials's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Shanghai Sinyang Semiconductor Materials has 1 warning sign we think you should be aware of.

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.

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