We Think SG Micro (SZSE:300661) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, SG Micro Corp (SZSE:300661) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SG Micro

What Is SG Micro's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 SG Micro had CN¥52.6m of debt, an increase on none, over one year. But it also has CN¥2.06b in cash to offset that, meaning it has CN¥2.01b net cash.

How Healthy Is SG Micro's Balance Sheet?

We can see from the most recent balance sheet that SG Micro had liabilities of CN¥746.9m falling due within a year, and liabilities of CN¥294.7m due beyond that. On the other hand, it had cash of CN¥2.06b and CN¥210.0m worth of receivables due within a year. So it can boast CN¥1.23b more liquid assets than total liabilities.

This short term liquidity is a sign that SG Micro could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SG Micro 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 SG Micro has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SG Micro's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SG Micro 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, SG Micro produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case SG Micro has CN¥2.01b in net cash and a decent-looking balance sheet. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think SG Micro's use of debt is risky. 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 instance, we've identified 1 warning sign for SG Micro that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.