Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shanghai Sinyang Semiconductor Materials Co., Ltd. (SZSE:300236) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shanghai Sinyang Semiconductor Materials's Debt?

As you can see below, Shanghai Sinyang Semiconductor Materials had CN¥569.8m of debt at March 2024, down from CN¥742.5m a year prior. However, its balance sheet shows it holds CN¥858.8m in cash, so it actually has CN¥289.0m net cash.

How Strong Is Shanghai Sinyang Semiconductor Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Sinyang Semiconductor Materials had liabilities of CN¥659.6m due within 12 months and liabilities of CN¥602.3m due beyond that. Offsetting this, it had CN¥858.8m in cash and CN¥764.4m in receivables that were due within 12 months. So it actually has CN¥361.3m more liquid assets than total liabilities.

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

One way Shanghai Sinyang Semiconductor Materials could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 15%, as it did over the last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Sinyang Semiconductor Materials'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, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Sinyang Semiconductor Materials 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, Shanghai Sinyang Semiconductor Materials 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 we empathize with investors who find debt concerning, you should keep in mind that Shanghai Sinyang Semiconductor Materials has net cash of CN¥289.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 15% over the last year. So we are not troubled with Shanghai Sinyang Semiconductor Materials's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shanghai Sinyang Semiconductor Materials , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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