Shanghai Fudan Microelectronics Group (HKG:1385) Has A Pretty 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.' 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, Shanghai Fudan Microelectronics Group Company Limited (HKG:1385) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanghai Fudan Microelectronics Group

What Is Shanghai Fudan Microelectronics Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Shanghai Fudan Microelectronics Group had debt of CN¥69.2m, up from CN¥50.0m in one year. However, its balance sheet shows it holds CN¥1.27b in cash, so it actually has CN¥1.20b net cash.

How Strong Is Shanghai Fudan Microelectronics Group's Balance Sheet?

The latest balance sheet data shows that Shanghai Fudan Microelectronics Group had liabilities of CN¥903.9m due within a year, and liabilities of CN¥53.8m falling due after that. On the other hand, it had cash of CN¥1.27b and CN¥1.08b worth of receivables due within a year. So it can boast CN¥1.40b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Fudan Microelectronics Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Fudan Microelectronics Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Shanghai Fudan Microelectronics Group grew its EBIT by 151% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Fudan Microelectronics Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Fudan Microelectronics Group 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. 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Fudan Microelectronics Group has net cash of CN¥1.20b, as well as more liquid assets than liabilities. And we liked the look of last year's 151% year-on-year EBIT growth. So we don't have any problem with Shanghai Fudan Microelectronics Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shanghai Fudan Microelectronics Group 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.