These 4 Measures Indicate That Anhui Hengyuan Coal Industry and Electricity PowerLtd (SHSE:600971) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Anhui Hengyuan Coal Industry and Electricity Power Co.,Ltd (SHSE:600971) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Anhui Hengyuan Coal Industry and Electricity PowerLtd

How Much Debt Does Anhui Hengyuan Coal Industry and Electricity PowerLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Anhui Hengyuan Coal Industry and Electricity PowerLtd had debt of CN¥1.96b, up from CN¥1.69b in one year. However, it does have CN¥7.46b in cash offsetting this, leading to net cash of CN¥5.50b.

How Healthy Is Anhui Hengyuan Coal Industry and Electricity PowerLtd's Balance Sheet?

The latest balance sheet data shows that Anhui Hengyuan Coal Industry and Electricity PowerLtd had liabilities of CN¥5.84b due within a year, and liabilities of CN¥2.51b falling due after that. Offsetting this, it had CN¥7.46b in cash and CN¥2.34b in receivables that were due within 12 months. So it actually has CN¥1.46b more liquid assets than total liabilities.

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

In fact Anhui Hengyuan Coal Industry and Electricity PowerLtd's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Anhui Hengyuan Coal Industry and Electricity PowerLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Anhui Hengyuan Coal Industry and Electricity PowerLtd 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 Hengyuan Coal Industry and Electricity PowerLtd recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Hengyuan Coal Industry and Electricity PowerLtd has CN¥5.50b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.0b, being 91% of its EBIT. So we are not troubled with Anhui Hengyuan Coal Industry and Electricity PowerLtd's debt use. 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. Case in point: We've spotted 1 warning sign for Anhui Hengyuan Coal Industry and Electricity PowerLtd you should be aware of.

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.

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