Anjoy Foods Group (SHSE:603345) Could Easily Take On More 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Anjoy Foods Group Co., Ltd. (SHSE:603345) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Anjoy Foods Group

What Is Anjoy Foods Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Anjoy Foods Group had CN¥231.0m of debt in March 2024, down from CN¥443.3m, one year before. But on the other hand it also has CN¥6.55b in cash, leading to a CN¥6.32b net cash position.

How Healthy Is Anjoy Foods Group's Balance Sheet?

We can see from the most recent balance sheet that Anjoy Foods Group had liabilities of CN¥3.64b falling due within a year, and liabilities of CN¥394.0m due beyond that. Offsetting this, it had CN¥6.55b in cash and CN¥535.1m in receivables that were due within 12 months. So it can boast CN¥3.05b more liquid assets than total liabilities.

This short term liquidity is a sign that Anjoy Foods Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anjoy Foods Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Anjoy Foods Group grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anjoy Foods Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Anjoy Foods Group 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. In the last three years, Anjoy Foods Group's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anjoy Foods Group has net cash of CN¥6.32b, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So is Anjoy Foods Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Anjoy Foods Group has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com