Here’s why the Shanghai Fudan Microelectronics Group (HKG: 1385) can responsibly manage its debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Shanghai Fudan Microelectronics Group Company Limited (HKG: 1385) carries a debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Shanghai Fudan Microelectronics Group
What is the net debt of the Shanghai Fudan Microelectronics group?
The image below, which you can click for more details, shows that in September 2021, the Shanghai Fudan Microelectronics Group had CN 63.3 million in debt, down from zero in a year. But it also has CN 1.14 billion in cash to make up for that, which means it has a net cash position of CN 1.07 billion.
How healthy is the Shanghai Fudan Microelectronics Group balance sheet?
We can see from the most recent balance sheet that the Shanghai Fudan Microelectronics Group had CN 676.3 million liabilities due within one year, and CN 137.3 million liabilities due beyond. . On the other hand, he had CN 1.14 billion in cash and CN 864.6 million in receivables due within one year. So he actually CN ¥ 1.19b Following liquid assets as total liabilities.
This short-term liquidity is a sign that Shanghai Fudan Microelectronics Group could likely repay its debt with ease, as its balance sheet is far from tight. Put simply, the fact that the Shanghai Fudan Microelectronics Group has more cash than debt is probably a good indication that it can manage its debt safely.
Better yet, Shanghai Fudan Microelectronics Group increased its EBIT by 631% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether Shanghai Fudan Microelectronics Group can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. The Shanghai Fudan Microelectronics Group may have net cash on the balance sheet, but it is always interesting to examine the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs in its ability to manage debt. Over the past two years, Shanghai Fudan Microelectronics Group has generated free cash flow of 17% of its EBIT, a performance of no interest. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.
While it is always a good idea to investigate a company’s debt, in this case the Shanghai Fudan Microelectronics Group has a net cash position of 1.07 billion yuan and a seemingly decent balance sheet. And it impressed us with its EBIT growth of 631% over last year. We therefore do not believe that the use of debt by the Shanghai Fudan Microelectronics Group is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for Shanghai Fudan Microelectronics Group you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.