The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Jiangsu Aisen Semiconductor Material Co.,Ltd. (SHSE:688720) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Aisen Semiconductor MaterialLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Aisen Semiconductor MaterialLtd had CN¥151.9m of debt, an increase on CN¥40.5m, over one year. But on the other hand it also has CN¥381.6m in cash, leading to a CN¥229.7m net cash position.

A Look At Jiangsu Aisen Semiconductor MaterialLtd's Liabilities

We can see from the most recent balance sheet that Jiangsu Aisen Semiconductor MaterialLtd had liabilities of CN¥215.8m falling due within a year, and liabilities of CN¥41.1m due beyond that. On the other hand, it had cash of CN¥381.6m and CN¥295.7m worth of receivables due within a year. So it can boast CN¥420.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Aisen Semiconductor MaterialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Aisen Semiconductor MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Jiangsu Aisen Semiconductor MaterialLtd grew its EBIT by 155% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Aisen Semiconductor MaterialLtd 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 Jiangsu Aisen Semiconductor MaterialLtd 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. Over the last three years, Jiangsu Aisen Semiconductor MaterialLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Aisen Semiconductor MaterialLtd has CN¥229.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 155% over the last year. So we are not troubled with Jiangsu Aisen Semiconductor MaterialLtd'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangsu Aisen Semiconductor MaterialLtd you should know about.

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.

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