These 4 Measures Indicate That Anjoy Foods Group (SHSE:603345) 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.' 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. Importantly, Anjoy Foods Group Co., Ltd. (SHSE:603345) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 Anjoy Foods Group

What Is Anjoy Foods Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Anjoy Foods Group had CN¥117.1m of debt in September 2024, down from CN¥500.2m, one year before. But it also has CN¥5.69b in cash to offset that, meaning it has CN¥5.57b net cash.

How Healthy Is Anjoy Foods Group's Balance Sheet?

The latest balance sheet data shows that Anjoy Foods Group had liabilities of CN¥3.04b due within a year, and liabilities of CN¥379.7m falling due after that. On the other hand, it had cash of CN¥5.69b and CN¥728.5m worth of receivables due within a year. So it actually has CN¥3.00b more liquid assets than total liabilities.

This surplus suggests that Anjoy Foods Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Anjoy Foods Group boasts net cash, so it's fair to say it does not have a heavy debt load!

While Anjoy Foods Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Anjoy Foods Group's ability to maintain a healthy balance sheet going forward. 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. Anjoy Foods Group 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. Looking at the most recent three years, Anjoy Foods Group recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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¥5.57b, as well as more liquid assets than liabilities. So we are not troubled with Anjoy Foods Group's debt use. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Anjoy Foods Group's dividend history, without delay!

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.