Is Anhui HeliLtd (SHSE:600761) Using Too Much Debt?

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.' 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 can see that Anhui Heli Co.,Ltd. (SHSE:600761) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Anhui HeliLtd

How Much Debt Does Anhui HeliLtd Carry?

The image below, which you can click on for greater detail, shows that Anhui HeliLtd had debt of CN¥3.31b at the end of September 2024, a reduction from CN¥4.41b over a year. But on the other hand it also has CN¥6.85b in cash, leading to a CN¥3.54b net cash position.

A Look At Anhui HeliLtd's Liabilities

According to the last reported balance sheet, Anhui HeliLtd had liabilities of CN¥6.18b due within 12 months, and liabilities of CN¥1.71b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.85b as well as receivables valued at CN¥2.96b due within 12 months. So it can boast CN¥1.92b more liquid assets than total liabilities.

This short term liquidity is a sign that Anhui HeliLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anhui HeliLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Anhui HeliLtd has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Anhui HeliLtd can strengthen its balance sheet over time. 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. While Anhui HeliLtd 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. Looking at the most recent three years, Anhui HeliLtd recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui HeliLtd has CN¥3.54b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 8.0% in the last twelve months. So we are not troubled with Anhui HeliLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Anhui HeliLtd (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.