Is Anhui Guofeng New Materials (SZSE:000859) A Risky Investment?

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.' 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. Importantly, Anhui Guofeng New Materials Co., Ltd. (SZSE:000859) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Anhui Guofeng New Materials Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Anhui Guofeng New Materials had debt of CN¥128.7m, up from CN¥88.9m in one year. However, it does have CN¥487.7m in cash offsetting this, leading to net cash of CN¥359.0m.

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¥656.7m due within 12 months and liabilities of CN¥216.9m due beyond that. Offsetting this, it had CN¥487.7m in cash and CN¥483.2m in receivables that were due within 12 months. So it can boast CN¥97.3m more liquid assets than total liabilities.

This surplus suggests that Anhui Guofeng New Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Anhui Guofeng New Materials 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 it is Anhui Guofeng New Materials's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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.

So How Risky Is Anhui Guofeng New Materials?

While Anhui Guofeng New Materials lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥34m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Anhui Guofeng New Materials that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.