Anhui Jinhe IndustrialLtd (SZSE:002597) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Jinhe Industrial Co.,Ltd. (SZSE:002597) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Anhui Jinhe IndustrialLtd

How Much Debt Does Anhui Jinhe IndustrialLtd Carry?

As you can see below, Anhui Jinhe IndustrialLtd had CN¥1.58b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥3.14b in cash, so it actually has CN¥1.56b net cash.

How Strong Is Anhui Jinhe IndustrialLtd's Balance Sheet?

We can see from the most recent balance sheet that Anhui Jinhe IndustrialLtd had liabilities of CN¥1.59b falling due within a year, and liabilities of CN¥1.17b due beyond that. On the other hand, it had cash of CN¥3.14b and CN¥1.11b worth of receivables due within a year. So it actually has CN¥1.50b more liquid assets than total liabilities.

This short term liquidity is a sign that Anhui Jinhe IndustrialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Anhui Jinhe IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Anhui Jinhe IndustrialLtd if management cannot prevent a repeat of the 45% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anhui Jinhe IndustrialLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anhui Jinhe IndustrialLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Anhui Jinhe IndustrialLtd recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Jinhe IndustrialLtd has net cash of CN¥1.56b, as well as more liquid assets than liabilities. So we are not troubled with Anhui Jinhe IndustrialLtd's debt use. 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. We've identified 3 warning signs with Anhui Jinhe IndustrialLtd (at least 1 which shouldn't be ignored) , 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.