Anhui Guofeng New Materials (SZSE:000859) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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 Guofeng New Materials Co., Ltd. (SZSE:000859) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Guofeng New Materials

What Is Anhui Guofeng New Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Anhui Guofeng New Materials had CN¥415.0m of debt, an increase on CN¥228.8m, over one year. However, because it has a cash reserve of CN¥331.3m, its net debt is less, at about CN¥83.7m.

How Healthy Is Anhui Guofeng New Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Guofeng New Materials had liabilities of CN¥924.3m due within 12 months and liabilities of CN¥367.5m due beyond that. On the other hand, it had cash of CN¥331.3m and CN¥537.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥422.8m.

Since publicly traded Anhui Guofeng New Materials shares are worth a total of CN¥6.29b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Anhui Guofeng New Materials has virtually no net debt, 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 it is Anhui Guofeng New Materials's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Anhui Guofeng New Materials's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Anhui Guofeng New Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥121m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥461m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example Anhui Guofeng New Materials has 2 warning signs (and 1 which is potentially serious) 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.