Is Shanghai Fudan Microelectronics Group (HKG:1385) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Fudan Microelectronics Group Company Limited (HKG:1385) does carry debt. But the real question is whether this debt is making the company risky.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shanghai Fudan Microelectronics Group's Net Debt?

As you can see below, at the end of June 2025, Shanghai Fudan Microelectronics Group had CN¥1.65b of debt, up from CN¥1.51b a year ago. Click the image for more detail. However, it also had CN¥1.22b in cash, and so its net debt is CN¥437.0m.

A Look At Shanghai Fudan Microelectronics Group's Liabilities

According to the last reported balance sheet, Shanghai Fudan Microelectronics Group had liabilities of CN¥2.18b due within 12 months, and liabilities of CN¥452.8m due beyond 12 months. Offsetting this, it had CN¥1.22b in cash and CN¥2.20b in receivables that were due within 12 months. So it can boast CN¥787.0m more liquid assets than total liabilities.

Having regard to Shanghai Fudan Microelectronics Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥46.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Shanghai Fudan Microelectronics Group has a very light debt load indeed.

Check out our latest analysis for Shanghai Fudan Microelectronics Group

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Shanghai Fudan Microelectronics Group has a low net debt to EBITDA ratio of only 0.95. And its EBIT covers its interest expense a whopping 12.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In fact Shanghai Fudan Microelectronics Group's saving grace is its low debt levels, because its EBIT has tanked 43% 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 it is future earnings, more than anything, that will determine Shanghai Fudan Microelectronics Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Shanghai Fudan Microelectronics Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Shanghai Fudan Microelectronics Group's EBIT growth rate and conversion of EBIT to free cash flow definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that Shanghai Fudan Microelectronics Group is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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, we've discovered 2 warning signs for Shanghai Fudan Microelectronics Group that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.