Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies ACM Research (Shanghai), Inc. (SHSE:688082) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is ACM Research (Shanghai)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 ACM Research (Shanghai) had CN¥1.11b of debt, an increase on CN¥597.1m, over one year. However, its balance sheet shows it holds CN¥2.15b in cash, so it actually has CN¥1.04b net cash.

How Healthy Is ACM Research (Shanghai)'s Balance Sheet?

The latest balance sheet data shows that ACM Research (Shanghai) had liabilities of CN¥3.40b due within a year, and liabilities of CN¥779.4m falling due after that. On the other hand, it had cash of CN¥2.15b and CN¥2.15b worth of receivables due within a year. So it can boast CN¥112.0m more liquid assets than total liabilities.

This state of affairs indicates that ACM Research (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¥50.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, ACM Research (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that ACM Research (Shanghai) grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ACM Research (Shanghai)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ACM Research (Shanghai) 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, ACM Research (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 ACM Research (Shanghai) has net cash of CN¥1.04b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with ACM Research (Shanghai)'s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for ACM Research (Shanghai) that you should be aware of before investing here.

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.