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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Wuxi ETEK Microelectronics Co.,Ltd. (SHSE:688601) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
How Much Debt Does Wuxi ETEK MicroelectronicsLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Wuxi ETEK MicroelectronicsLtd had CN¥11.0m of debt in September 2023, down from CN¥20.0m, one year before. But it also has CN¥877.0m in cash to offset that, meaning it has CN¥866.0m net cash.
How Strong Is Wuxi ETEK MicroelectronicsLtd's Balance Sheet?
The latest balance sheet data shows that Wuxi ETEK MicroelectronicsLtd had liabilities of CN¥123.8m due within a year, and liabilities of CN¥7.25m falling due after that. On the other hand, it had cash of CN¥877.0m and CN¥265.5m worth of receivables due within a year. So it can boast CN¥1.01b more liquid assets than total liabilities.
This surplus suggests that Wuxi ETEK MicroelectronicsLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Wuxi ETEK MicroelectronicsLtd 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 Wuxi ETEK MicroelectronicsLtd has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wuxi ETEK MicroelectronicsLtd 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wuxi ETEK MicroelectronicsLtd 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, Wuxi ETEK MicroelectronicsLtd produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Wuxi ETEK MicroelectronicsLtd has net cash of CN¥866.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 75% year-on-year EBIT growth. So is Wuxi ETEK MicroelectronicsLtd's debt a risk? It doesn't seem so to us. 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 example - Wuxi ETEK MicroelectronicsLtd has 2 warning signs we think 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.
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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.