Is Anhui Ankai Automobile (SZSE:000868) Using Debt In A Risky Way?

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.' 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 note that Anhui Ankai Automobile Co., Ltd (SZSE:000868) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. 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.

What Is Anhui Ankai Automobile's Debt?

As you can see below, Anhui Ankai Automobile had CN¥137.6m of debt at December 2024, down from CN¥212.1m a year prior. However, its balance sheet shows it holds CN¥1.08b in cash, so it actually has CN¥937.6m net cash.

How Strong Is Anhui Ankai Automobile's Balance Sheet?

According to the last reported balance sheet, Anhui Ankai Automobile had liabilities of CN¥2.64b due within 12 months, and liabilities of CN¥72.2m due beyond 12 months. Offsetting this, it had CN¥1.08b in cash and CN¥1.21b in receivables that were due within 12 months. So its liabilities total CN¥426.7m more than the combination of its cash and short-term receivables.

Given Anhui Ankai Automobile has a market capitalization of CN¥5.98b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Anhui Ankai Automobile also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Anhui Ankai Automobile's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Anhui Ankai Automobile

In the last year Anhui Ankai Automobile wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to CN¥2.7b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Anhui Ankai Automobile?

Although Anhui Ankai Automobile had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥8.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Anhui Ankai Automobile is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Anhui Ankai Automobile , 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.