Does Anhui Huilong Agricultural Means of ProductionLtd (SZSE:002556) Have A Healthy Balance Sheet?

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.' 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 Huilong Agricultural Means of Production Co.,Ltd. (SZSE:002556) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Anhui Huilong Agricultural Means of ProductionLtd

What Is Anhui Huilong Agricultural Means of ProductionLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Anhui Huilong Agricultural Means of ProductionLtd had debt of CN¥3.57b, up from CN¥2.61b in one year. However, it does have CN¥1.69b in cash offsetting this, leading to net debt of about CN¥1.89b.

How Healthy Is Anhui Huilong Agricultural Means of ProductionLtd's Balance Sheet?

The latest balance sheet data shows that Anhui Huilong Agricultural Means of ProductionLtd had liabilities of CN¥6.15b due within a year, and liabilities of CN¥2.25b falling due after that. On the other hand, it had cash of CN¥1.69b and CN¥1.23b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.49b.

When you consider that this deficiency exceeds the company's CN¥4.01b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Anhui Huilong Agricultural Means of ProductionLtd'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 Huilong Agricultural Means of ProductionLtd had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to CN¥17b. That's not what we would hope to see.

Caveat Emptor

Importantly, Anhui Huilong Agricultural Means of ProductionLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥33m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥1.0b in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Anhui Huilong Agricultural Means of ProductionLtd has 4 warning signs (and 2 which can't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com