Anhui Gujing Distillery (SZSE:000596) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Anhui Gujing Distillery Co., Ltd. (SZSE:000596) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Anhui Gujing Distillery had CN¥207.0m of debt, an increase on CN¥106.7m, over one year. But on the other hand it also has CN¥17.3b in cash, leading to a CN¥17.1b net cash position.

How Strong Is Anhui Gujing Distillery's Balance Sheet?

According to the last reported balance sheet, Anhui Gujing Distillery had liabilities of CN¥15.4b due within 12 months, and liabilities of CN¥607.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥17.3b as well as receivables valued at CN¥4.98b due within 12 months. So it can boast CN¥6.31b more liquid assets than total liabilities.

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

On top of that, Anhui Gujing Distillery grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. Anhui Gujing 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 Gujing Distillery recorded free cash flow worth 78% 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 Gujing Distillery has CN¥17.1b in net cash and a decent-looking balance sheet. And we liked the look of last year's 42% 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 is concerning) 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.