Asian Star Anchor Chain Jiangsu (SHSE:601890) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Asian Star Anchor Chain Co., Ltd. Jiangsu (SHSE:601890) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asian Star Anchor Chain Jiangsu

What Is Asian Star Anchor Chain Jiangsu's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Asian Star Anchor Chain Jiangsu had debt of CN¥691.6m, up from CN¥456.4m in one year. But it also has CN¥2.58b in cash to offset that, meaning it has CN¥1.89b net cash.

A Look At Asian Star Anchor Chain Jiangsu's Liabilities

Zooming in on the latest balance sheet data, we can see that Asian Star Anchor Chain Jiangsu had liabilities of CN¥885.3m due within 12 months and liabilities of CN¥514.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.58b as well as receivables valued at CN¥622.1m due within 12 months. So it can boast CN¥1.80b more liquid assets than total liabilities.

This excess liquidity suggests that Asian Star Anchor Chain Jiangsu is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Asian Star Anchor Chain Jiangsu boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Asian Star Anchor Chain Jiangsu grew its EBIT by 13% last year, making its debt load easier to handle. 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 Asian Star Anchor Chain Jiangsu 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Asian Star Anchor Chain Jiangsu 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. Over the most recent three years, Asian Star Anchor Chain Jiangsu recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Asian Star Anchor Chain Jiangsu has CN¥1.89b in net cash and a decent-looking balance sheet. So we don't think Asian Star Anchor Chain Jiangsu's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Asian Star Anchor Chain Jiangsu .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.