Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Chengdu Sino-Microelectronics Tech. Co., Ltd. (SHSE:688709) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Chengdu Sino-Microelectronics Tech Carry?

The image below, which you can click on for greater detail, shows that Chengdu Sino-Microelectronics Tech had debt of CN¥313.0m at the end of September 2024, a reduction from CN¥712.7m over a year. But on the other hand it also has CN¥1.01b in cash, leading to a CN¥701.2m net cash position.

How Strong Is Chengdu Sino-Microelectronics Tech's Balance Sheet?

We can see from the most recent balance sheet that Chengdu Sino-Microelectronics Tech had liabilities of CN¥584.4m falling due within a year, and liabilities of CN¥75.9m due beyond that. On the other hand, it had cash of CN¥1.01b and CN¥1.17b worth of receivables due within a year. So it actually has CN¥1.53b more liquid assets than total liabilities.

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

In fact Chengdu Sino-Microelectronics Tech's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chengdu Sino-Microelectronics Tech 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chengdu Sino-Microelectronics Tech 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, Chengdu Sino-Microelectronics Tech 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 Chengdu Sino-Microelectronics Tech has CN¥701.2m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Chengdu Sino-Microelectronics Tech's balance sheet. 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. Be aware that Chengdu Sino-Microelectronics Tech is showing 2 warning signs in our investment analysis , you should know about...

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.