Is Anhui Yingjia Distillery (SHSE:603198) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Anhui Yingjia Distillery Co., Ltd. (SHSE:603198) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Yingjia Distillery

What Is Anhui Yingjia Distillery's Debt?

You can click the graphic below for the historical numbers, but it shows that Anhui Yingjia Distillery had CN¥12.8m of debt in September 2024, down from CN¥21.2m, one year before. However, it does have CN¥3.63b in cash offsetting this, leading to net cash of CN¥3.62b.

A Look At Anhui Yingjia Distillery's Liabilities

According to the last reported balance sheet, Anhui Yingjia Distillery had liabilities of CN¥2.62b due within 12 months, and liabilities of CN¥150.7m due beyond 12 months. On the other hand, it had cash of CN¥3.63b and CN¥84.7m worth of receivables due within a year. So it can boast CN¥944.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Anhui Yingjia Distillery could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Anhui Yingjia Distillery boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Anhui Yingjia Distillery has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anhui Yingjia Distillery 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. Anhui Yingjia Distillery 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. Over the most recent three years, Anhui Yingjia Distillery recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Yingjia Distillery has CN¥3.62b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 26% over the last year. So is Anhui Yingjia Distillery's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Anhui Yingjia Distillery's earnings per share history for free.

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.