Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Advanced Micro-Fabrication Equipment China Carry?

The chart below, which you can click on for greater detail, shows that Advanced Micro-Fabrication Equipment China had CN¥250.0m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥7.53b in cash, leading to a CN¥7.28b net cash position.

How Strong Is Advanced Micro-Fabrication Equipment China's Balance Sheet?

The latest balance sheet data shows that Advanced Micro-Fabrication Equipment China had liabilities of CN¥6.14b due within a year, and liabilities of CN¥393.4m falling due after that. On the other hand, it had cash of CN¥7.53b and CN¥1.44b worth of receivables due within a year. So it actually has CN¥2.44b more liquid assets than total liabilities.

This state of affairs indicates that Advanced Micro-Fabrication Equipment China'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¥128.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Advanced Micro-Fabrication Equipment China has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Advanced Micro-Fabrication Equipment China grew its EBIT by 8.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Advanced Micro-Fabrication Equipment China'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Advanced Micro-Fabrication Equipment China 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, Advanced Micro-Fabrication Equipment China 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 Advanced Micro-Fabrication Equipment China has CN¥7.28b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 8.7% over the last year. So we are not troubled with Advanced Micro-Fabrication Equipment China's debt use. 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. We've identified 2 warning signs with Advanced Micro-Fabrication Equipment China (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.