Here's Why Anhui Golden Seed Winery (SHSE:600199) Can Manage Its Debt Responsibly

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.' 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 Anhui Golden Seed Winery Co., Ltd. (SHSE:600199) makes use of debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Anhui Golden Seed Winery

How Much Debt Does Anhui Golden Seed Winery Carry?

As you can see below, at the end of June 2024, Anhui Golden Seed Winery had CN¥36.7m of debt, up from CN¥29.7m a year ago. Click the image for more detail. But it also has CN¥356.8m in cash to offset that, meaning it has CN¥320.1m net cash.

A Look At Anhui Golden Seed Winery's Liabilities

We can see from the most recent balance sheet that Anhui Golden Seed Winery had liabilities of CN¥624.6m falling due within a year, and liabilities of CN¥158.5m due beyond that. Offsetting these obligations, it had cash of CN¥356.8m as well as receivables valued at CN¥137.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥289.2m.

Since publicly traded Anhui Golden Seed Winery shares are worth a total of CN¥8.81b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Anhui Golden Seed Winery boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Anhui Golden Seed Winery made a loss at the EBIT level, last year, it was also good to see that it generated CN¥22m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Golden Seed Winery's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Anhui Golden Seed Winery may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Anhui Golden Seed Winery burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Anhui Golden Seed Winery's liabilities, but we can be reassured by the fact it has has net cash of CN¥320.1m. So we don't have any problem with Anhui Golden Seed Winery's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Anhui Golden Seed Winery .

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.