Does Anhui Gourgen Traffic ConstructionLtd (SHSE:603815) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Anhui Gourgen Traffic Construction Co.,Ltd. (SHSE:603815) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Anhui Gourgen Traffic ConstructionLtd

What Is Anhui Gourgen Traffic ConstructionLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Anhui Gourgen Traffic ConstructionLtd had CN¥1.75b of debt, an increase on CN¥1.35b, over one year. However, it also had CN¥1.24b in cash, and so its net debt is CN¥504.1m.

How Strong Is Anhui Gourgen Traffic ConstructionLtd's Balance Sheet?

We can see from the most recent balance sheet that Anhui Gourgen Traffic ConstructionLtd had liabilities of CN¥7.44b falling due within a year, and liabilities of CN¥1.01b due beyond that. Offsetting these obligations, it had cash of CN¥1.24b as well as receivables valued at CN¥5.91b due within 12 months. So it has liabilities totalling CN¥1.30b more than its cash and near-term receivables, combined.

Anhui Gourgen Traffic ConstructionLtd has a market capitalization of CN¥4.11b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 1.3 times EBITDA, Anhui Gourgen Traffic ConstructionLtd is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 8.4 times the interest expense over the last year. Also good is that Anhui Gourgen Traffic ConstructionLtd grew its EBIT at 18% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Anhui Gourgen Traffic ConstructionLtd will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Anhui Gourgen Traffic ConstructionLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Anhui Gourgen Traffic ConstructionLtd's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example its EBIT growth rate was refreshing. We think that Anhui Gourgen Traffic ConstructionLtd's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Anhui Gourgen Traffic ConstructionLtd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.