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, National Silicon Industry Group Co.,Ltd. (SHSE:688126) does carry 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is National Silicon Industry GroupLtd's Net Debt?

As you can see below, at the end of September 2023, National Silicon Industry GroupLtd had CN¥3.16b of debt, up from CN¥2.66b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.00b in cash, so it actually has CN¥2.84b net cash.

How Strong Is National Silicon Industry GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that National Silicon Industry GroupLtd had liabilities of CN¥2.12b due within 12 months and liabilities of CN¥4.31b due beyond that. Offsetting this, it had CN¥6.00b in cash and CN¥747.1m in receivables that were due within 12 months. So it actually has CN¥325.5m more liquid assets than total liabilities.

Having regard to National Silicon Industry GroupLtd'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¥41.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, National Silicon Industry GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that National Silicon Industry GroupLtd has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine National Silicon Industry GroupLtd'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. National Silicon Industry GroupLtd 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. Over the last two years, National Silicon Industry GroupLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that National Silicon Industry GroupLtd has net cash of CN¥2.84b, as well as more liquid assets than liabilities. So while National Silicon Industry GroupLtd does not have a great balance sheet, it's certainly not too bad. 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. Be aware that National Silicon Industry GroupLtd is showing 1 warning sign in our investment analysis , you should know about...

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.