Is Anhui Huilong Agricultural Means of ProductionLtd (SZSE:002556) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Anhui Huilong Agricultural Means of Production Co.,Ltd. (SZSE:002556) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its 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?

You can click the graphic below for the historical numbers, but it shows that Anhui Huilong Agricultural Means of ProductionLtd had CN¥3.04b of debt in June 2024, down from CN¥3.22b, one year before. However, it does have CN¥1.10b in cash offsetting this, leading to net debt of about CN¥1.95b.

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

Zooming in on the latest balance sheet data, we can see that Anhui Huilong Agricultural Means of ProductionLtd had liabilities of CN¥5.10b due within 12 months and liabilities of CN¥2.21b due beyond that. Offsetting these obligations, it had cash of CN¥1.10b as well as receivables valued at CN¥1.37b due within 12 months. So it has liabilities totalling CN¥4.84b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥4.62b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anhui Huilong Agricultural Means of ProductionLtd will need earnings to service that debt. 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 Huilong Agricultural Means of ProductionLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to CN¥18b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Anhui Huilong Agricultural Means of ProductionLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥61m. 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¥271m in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 6 warning signs with Anhui Huilong Agricultural Means of ProductionLtd (at least 3 which are significant) , 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.