Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Anji Microelectronics Technology (Shanghai) Co., Ltd. (SHSE:688019) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Anji Microelectronics Technology (Shanghai)

What Is Anji Microelectronics Technology (Shanghai)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Anji Microelectronics Technology (Shanghai) had CN¥22.7m of debt, an increase on CN¥15.8m, over one year. However, it does have CN¥481.8m in cash offsetting this, leading to net cash of CN¥459.1m.

How Healthy Is Anji Microelectronics Technology (Shanghai)'s Balance Sheet?

The latest balance sheet data shows that Anji Microelectronics Technology (Shanghai) had liabilities of CN¥342.8m due within a year, and liabilities of CN¥130.7m falling due after that. On the other hand, it had cash of CN¥481.8m and CN¥283.4m worth of receivables due within a year. So it actually has CN¥291.7m more liquid assets than total liabilities.

This state of affairs indicates that Anji Microelectronics Technology (Shanghai)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥19.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Anji Microelectronics Technology (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Anji Microelectronics Technology (Shanghai) grew its EBIT by 294% 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 Anji Microelectronics Technology (Shanghai) 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. While Anji Microelectronics Technology (Shanghai) 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, Anji Microelectronics Technology (Shanghai) 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 Anji Microelectronics Technology (Shanghai) has net cash of CN¥459.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 294% over the last year. So we are not troubled with Anji Microelectronics Technology (Shanghai)'s debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Anji Microelectronics Technology (Shanghai) (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.