Health Check: How Prudently Does Anhui Estone Materials TechnologyLtd (SHSE:688733) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Anhui Estone Materials Technology Co.,Ltd (SHSE:688733) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Anhui Estone Materials TechnologyLtd

What Is Anhui Estone Materials TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Anhui Estone Materials TechnologyLtd had debt of CN¥555.3m, up from CN¥370.2m in one year. But on the other hand it also has CN¥935.6m in cash, leading to a CN¥380.3m net cash position.

A Look At Anhui Estone Materials TechnologyLtd's Liabilities

According to the last reported balance sheet, Anhui Estone Materials TechnologyLtd had liabilities of CN¥524.1m due within 12 months, and liabilities of CN¥448.0m due beyond 12 months. Offsetting this, it had CN¥935.6m in cash and CN¥247.1m in receivables that were due within 12 months. So it actually has CN¥210.7m more liquid assets than total liabilities.

This surplus suggests that Anhui Estone Materials TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Anhui Estone Materials TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Estone Materials TechnologyLtd 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.

In the last year Anhui Estone Materials TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 7.2%, to CN¥488m. That's not what we would hope to see.

So How Risky Is Anhui Estone Materials TechnologyLtd?

While Anhui Estone Materials TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥19m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should learn about the 3 warning signs we've spotted with Anhui Estone Materials TechnologyLtd (including 1 which is potentially serious) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.