Anhui Jialiqi Advanced Composites Technology (SZSE:301586) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Anhui Jialiqi Advanced Composites Technology Co., Ltd. (SZSE:301586) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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.

View our latest analysis for Anhui Jialiqi Advanced Composites Technology

How Much Debt Does Anhui Jialiqi Advanced Composites Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui Jialiqi Advanced Composites Technology had debt of CN¥94.0m, up from CN¥71.0m in one year. However, it does have CN¥683.3m in cash offsetting this, leading to net cash of CN¥589.3m.

How Healthy Is Anhui Jialiqi Advanced Composites Technology's Balance Sheet?

The latest balance sheet data shows that Anhui Jialiqi Advanced Composites Technology had liabilities of CN¥409.8m due within a year, and liabilities of CN¥93.5m falling due after that. Offsetting this, it had CN¥683.3m in cash and CN¥477.3m in receivables that were due within 12 months. So it can boast CN¥657.3m more liquid assets than total liabilities.

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

It is just as well that Anhui Jialiqi Advanced Composites Technology's load is not too heavy, because its EBIT was down 50% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Jialiqi Advanced Composites Technology 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anhui Jialiqi Advanced Composites Technology 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 last three years, Anhui Jialiqi Advanced Composites Technology reported free cash flow worth 8.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Jialiqi Advanced Composites Technology has net cash of CN¥589.3m, as well as more liquid assets than liabilities. So we don't have any problem with Anhui Jialiqi Advanced Composites Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Anhui Jialiqi Advanced Composites Technology has 2 warning signs we think 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.