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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that China Wafer Level CSP Co., Ltd. (SHSE:603005) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is China Wafer Level CSP's Net Debt?

As you can see below, at the end of March 2024, China Wafer Level CSP had CN¥383.4m of debt, up from CN¥316.5m a year ago. Click the image for more detail. But it also has CN¥2.65b in cash to offset that, meaning it has CN¥2.27b net cash.

How Healthy Is China Wafer Level CSP's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Wafer Level CSP had liabilities of CN¥496.4m due within 12 months and liabilities of CN¥262.3m due beyond that. Offsetting this, it had CN¥2.65b in cash and CN¥115.5m in receivables that were due within 12 months. So it actually has CN¥2.01b more liquid assets than total liabilities.

This surplus suggests that China Wafer Level CSP has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Wafer Level CSP has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that China Wafer Level CSP has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Wafer Level CSP'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. China Wafer Level CSP 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 three years, China Wafer Level CSP recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Wafer Level CSP has CN¥2.27b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥127m, being 82% of its EBIT. So we don't think China Wafer Level CSP's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Wafer Level CSP's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com