Anhui Jinhe IndustrialLtd (SZSE:002597) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Anhui Jinhe Industrial Co.,Ltd. (SZSE:002597) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Anhui Jinhe IndustrialLtd

How Much Debt Does Anhui Jinhe IndustrialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Anhui Jinhe IndustrialLtd had CN¥1.60b of debt in March 2024, down from CN¥1.74b, one year before. However, it does have CN¥3.41b in cash offsetting this, leading to net cash of CN¥1.82b.

How Strong Is Anhui Jinhe IndustrialLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Jinhe IndustrialLtd had liabilities of CN¥2.02b due within 12 months and liabilities of CN¥1.03b due beyond that. Offsetting this, it had CN¥3.41b in cash and CN¥1.05b in receivables that were due within 12 months. So it actually has CN¥1.41b more liquid assets than total liabilities.

This surplus suggests that Anhui Jinhe IndustrialLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Anhui Jinhe IndustrialLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Anhui Jinhe IndustrialLtd's saving grace is its low debt levels, because its EBIT has tanked 68% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Anhui Jinhe IndustrialLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Anhui Jinhe IndustrialLtd recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥1.82b, as well as more liquid assets than liabilities. So we don't have any problem with Anhui Jinhe IndustrialLtd's use of debt. 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, we've discovered 2 warning signs for Anhui Jinhe IndustrialLtd that you should be aware of before investing here.

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.

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