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.' 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 Jiangyin Jianghua Microelectronics Materials Co., Ltd (SHSE:603078) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangyin Jianghua Microelectronics Materials's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangyin Jianghua Microelectronics Materials had debt of CN¥615.2m, up from CN¥280.3m in one year. But it also has CN¥735.2m in cash to offset that, meaning it has CN¥120.0m net cash.

A Look At Jiangyin Jianghua Microelectronics Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangyin Jianghua Microelectronics Materials had liabilities of CN¥524.8m due within 12 months and liabilities of CN¥307.4m due beyond that. Offsetting these obligations, it had cash of CN¥735.2m as well as receivables valued at CN¥442.5m due within 12 months. So it can boast CN¥345.5m more liquid assets than total liabilities.

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

On the other hand, Jiangyin Jianghua Microelectronics Materials's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangyin Jianghua Microelectronics Materials can strengthen its balance sheet over time. 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. Jiangyin Jianghua Microelectronics 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. During the last three years, Jiangyin Jianghua Microelectronics Materials burned a lot of cash. 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 Jiangyin Jianghua Microelectronics Materials has net cash of CN¥120.0m, as well as more liquid assets than liabilities. So we don't have any problem with Jiangyin Jianghua Microelectronics Materials's use of debt. 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 Jiangyin Jianghua Microelectronics Materials's earnings per share history for free.

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.

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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.