Is Anhui Golden Seed Winery (SHSE:600199) Using Debt Sensibly?

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 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. We can see that Anhui Golden Seed Winery Co., Ltd. (SHSE:600199) 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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Anhui Golden Seed Winery

What Is Anhui Golden Seed Winery's Debt?

As you can see below, at the end of September 2024, Anhui Golden Seed Winery had CN¥116.7m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥353.4m in cash, leading to a CN¥236.8m net cash position.

How Healthy Is Anhui Golden Seed Winery's Balance Sheet?

According to the last reported balance sheet, Anhui Golden Seed Winery had liabilities of CN¥719.9m due within 12 months, and liabilities of CN¥157.1m due beyond 12 months. On the other hand, it had cash of CN¥353.4m and CN¥129.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥394.5m.

Given Anhui Golden Seed Winery has a market capitalization of CN¥7.59b, 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 Golden Seed Winery also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Golden Seed Winery can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Anhui Golden Seed Winery had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥1.2b. That's not what we would hope to see.

So How Risky Is Anhui Golden Seed Winery?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Anhui Golden Seed Winery lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥348m and booked a CN¥87m accounting loss. However, it has net cash of CN¥236.8m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Anhui Golden Seed Winery's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.