Is Anhui Gujing Distillery (SZSE:000596) A Risky Investment?

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.' 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?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, 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 September 2024 Anhui Gujing Distillery had CN¥214.5m of debt, an increase on CN¥174.3m, over one year. However, it does have CN¥17.0b in cash offsetting this, leading to net cash of CN¥16.7b.

How Strong Is Anhui Gujing Distillery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Gujing Distillery had liabilities of CN¥12.4b due within 12 months and liabilities of CN¥546.5m due beyond that. Offsetting these obligations, it had cash of CN¥17.0b as well as receivables valued at CN¥1.27b 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. 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.

Another good sign is that Anhui Gujing Distillery has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anhui Gujing Distillery's ability to maintain a healthy balance sheet going forward. 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. In the last three years, Anhui Gujing Distillery's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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. 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, we've discovered 2 warning signs for Anhui Gujing Distillery (1 is a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.