We Think Anhui XDLK Microsystem (SHSE:688582) Can Manage Its Debt With Ease

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. Importantly, Anhui XDLK Microsystem Corporation Limited (SHSE:688582) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Anhui XDLK Microsystem

What Is Anhui XDLK Microsystem's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui XDLK Microsystem had debt of CN¥21.9m, up from none in one year. But on the other hand it also has CN¥1.13b in cash, leading to a CN¥1.11b net cash position.

A Look At Anhui XDLK Microsystem's Liabilities

Zooming in on the latest balance sheet data, we can see that Anhui XDLK Microsystem had liabilities of CN¥42.7m due within 12 months and liabilities of CN¥21.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥395.9m due within 12 months. So it can boast CN¥1.46b more liquid assets than total liabilities.

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

On top of that, Anhui XDLK Microsystem grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anhui XDLK Microsystem'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. Anhui XDLK Microsystem 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. Looking at the most recent three years, Anhui XDLK Microsystem recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui XDLK Microsystem has CN¥1.11b in net cash and a decent-looking balance sheet. And we liked the look of last year's 61% year-on-year EBIT growth. So we don't think Anhui XDLK Microsystem's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Anhui XDLK Microsystem's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.