Anhui Guangxin Agrochemical (SHSE:603599) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Anhui Guangxin Agrochemical

How Much Debt Does Anhui Guangxin Agrochemical Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Anhui Guangxin Agrochemical had debt of CN¥3.14b, up from CN¥1.53b in one year. However, its balance sheet shows it holds CN¥11.4b in cash, so it actually has CN¥8.23b net cash.

How Strong Is Anhui Guangxin Agrochemical's Balance Sheet?

The latest balance sheet data shows that Anhui Guangxin Agrochemical had liabilities of CN¥6.31b due within a year, and liabilities of CN¥110.2m falling due after that. Offsetting these obligations, it had cash of CN¥11.4b as well as receivables valued at CN¥560.8m due within 12 months. So it actually has CN¥5.51b more liquid assets than total liabilities.

This surplus strongly suggests that Anhui Guangxin Agrochemical has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Anhui Guangxin Agrochemical has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Anhui Guangxin Agrochemical's load is not too heavy, because its EBIT was down 76% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Guangxin Agrochemical'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Anhui Guangxin Agrochemical 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 Guangxin Agrochemical recorded free cash flow worth 72% 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 Guangxin Agrochemical has CN¥8.23b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -CN¥384m, being 72% of its EBIT. So we don't think Anhui Guangxin Agrochemical's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Anhui Guangxin Agrochemical (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.