Health Check: How Prudently Does AnnilLtd (SZSE:002875) Use Debt?

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.' 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. As with many other companies Annil Co.,Ltd (SZSE:002875) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AnnilLtd

How Much Debt Does AnnilLtd Carry?

You can click the graphic below for the historical numbers, but it shows that AnnilLtd had CN¥99.0m of debt in June 2024, down from CN¥130.0m, one year before. However, its balance sheet shows it holds CN¥602.0m in cash, so it actually has CN¥503.0m net cash.

How Healthy Is AnnilLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AnnilLtd had liabilities of CN¥242.9m due within 12 months and liabilities of CN¥125.4m due beyond that. On the other hand, it had cash of CN¥602.0m and CN¥84.6m worth of receivables due within a year. So it can boast CN¥318.4m more liquid assets than total liabilities.

This short term liquidity is a sign that AnnilLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AnnilLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AnnilLtd'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.

Over 12 months, AnnilLtd made a loss at the EBIT level, and saw its revenue drop to CN¥739m, which is a fall of 14%. We would much prefer see growth.

So How Risky Is AnnilLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months AnnilLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥297k and booked a CN¥104m accounting loss. But the saving grace is the CN¥503.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for AnnilLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.