Is Anhui Xinke New MaterialsLtd (SHSE:600255) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Anhui Xinke New Materials Co.,Ltd (SHSE:600255) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Anhui Xinke New MaterialsLtd

What Is Anhui Xinke New MaterialsLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Anhui Xinke New MaterialsLtd had CN¥683.7m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥785.4m in cash, leading to a CN¥101.7m net cash position.

How Strong Is Anhui Xinke New MaterialsLtd's Balance Sheet?

The latest balance sheet data shows that Anhui Xinke New MaterialsLtd had liabilities of CN¥2.01b due within a year, and liabilities of CN¥244.7m falling due after that. Offsetting this, it had CN¥785.4m in cash and CN¥551.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥917.6m more than its cash and near-term receivables, combined.

Given Anhui Xinke New MaterialsLtd has a market capitalization of CN¥7.39b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Anhui Xinke New MaterialsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Anhui Xinke New MaterialsLtd improved its EBIT from a last year's loss to a positive CN¥61m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anhui Xinke New MaterialsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Anhui Xinke New MaterialsLtd 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. During the last year, Anhui Xinke New MaterialsLtd generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Anhui Xinke New MaterialsLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥101.7m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥52m. So we don't have any problem with Anhui Xinke New MaterialsLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Anhui Xinke New MaterialsLtd's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.