Does Anhui Great Wall Military Industry (SHSE:601606) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Anhui Great Wall Military Industry Co., Ltd. (SHSE:601606) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Anhui Great Wall Military Industry

How Much Debt Does Anhui Great Wall Military Industry Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui Great Wall Military Industry had debt of CN¥494.2m, up from CN¥450.0m in one year. However, it does have CN¥222.9m in cash offsetting this, leading to net debt of about CN¥271.3m.

How Healthy Is Anhui Great Wall Military Industry's Balance Sheet?

The latest balance sheet data shows that Anhui Great Wall Military Industry had liabilities of CN¥1.56b due within a year, and liabilities of CN¥413.2m falling due after that. On the other hand, it had cash of CN¥222.9m and CN¥1.85b worth of receivables due within a year. So it can boast CN¥102.7m more liquid assets than total liabilities.

This state of affairs indicates that Anhui Great Wall Military Industry'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¥7.96b company is short on cash, but still worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Anhui Great Wall Military Industry's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Anhui Great Wall Military Industry had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to CN¥1.6b. We would much prefer see growth.

Caveat Emptor

Importantly, Anhui Great Wall Military Industry had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥73m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Anhui Great Wall Military Industry , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.