Anhui Guangxin Agrochemical (SHSE:603599) Has A Pretty Healthy Balance Sheet

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 can see that Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, 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.

View our latest analysis for Anhui Guangxin Agrochemical

What Is Anhui Guangxin Agrochemical's Net Debt?

As you can see below, at the end of March 2024, Anhui Guangxin Agrochemical had CN¥2.36b of debt, up from CN¥1.37b a year ago. Click the image for more detail. But on the other hand it also has CN¥10.4b in cash, leading to a CN¥8.02b net cash position.

A Look At Anhui Guangxin Agrochemical's Liabilities

According to the last reported balance sheet, Anhui Guangxin Agrochemical had liabilities of CN¥5.01b due within 12 months, and liabilities of CN¥91.9m due beyond 12 months. Offsetting this, it had CN¥10.4b in cash and CN¥527.1m in receivables that were due within 12 months. So it actually has CN¥5.81b more liquid assets than total liabilities.

This surplus liquidity suggests that Anhui Guangxin Agrochemical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Anhui Guangxin Agrochemical boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Anhui Guangxin Agrochemical if management cannot prevent a repeat of the 63% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Guangxin Agrochemical 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Anhui Guangxin Agrochemical 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. During the last three years, Anhui Guangxin Agrochemical produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Guangxin Agrochemical has net cash of CN¥8.02b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥291m, being 75% of its EBIT. So is Anhui Guangxin Agrochemical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Anhui Guangxin Agrochemical has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.