Anhui Gujing Distillery (SZSE:000596) Could Easily Take On More Debt

Warren Buffett famously said, '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. We note that Anhui Gujing Distillery Co., Ltd. (SZSE:000596) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Anhui Gujing Distillery

What Is Anhui Gujing Distillery's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui Gujing Distillery had debt of CN¥214.5m, up from CN¥174.3m in one year. But on the other hand it also has CN¥17.0b in cash, leading to a CN¥16.7b net cash position.

How Healthy Is Anhui Gujing Distillery's Balance Sheet?

According to the last reported balance sheet, Anhui Gujing Distillery had liabilities of CN¥12.4b due within 12 months, and liabilities of CN¥546.5m due beyond 12 months. Offsetting this, it had CN¥17.0b in cash and CN¥1.27b in receivables that were due within 12 months. So it can boast CN¥5.27b more liquid assets than total liabilities.

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

Also positive, Anhui Gujing Distillery grew its EBIT by 27% 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 Anhui Gujing Distillery 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anhui Gujing Distillery 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, Anhui Gujing Distillery's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Gujing Distillery has CN¥16.7b in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So is Anhui Gujing Distillery's debt a risk? It doesn't seem so to us. 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. For example Anhui Gujing Distillery has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.