We Think Anhui Jinhe IndustrialLtd (SZSE:002597) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Anhui Jinhe Industrial Co.,Ltd. (SZSE:002597) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at 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¥1.64b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥4.04b in cash to offset that, meaning it has CN¥2.39b 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¥2.63b falling due within a year, and liabilities of CN¥539.5m due beyond that. Offsetting this, it had CN¥4.04b in cash and CN¥1.18b in receivables that were due within 12 months. So it can boast CN¥2.05b more liquid assets than total liabilities.

It's good to see that Anhui Jinhe IndustrialLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 51% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anhui Jinhe IndustrialLtd can strengthen its balance sheet over time. 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. During the last three years, Anhui Jinhe IndustrialLtd produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Jinhe IndustrialLtd has CN¥2.39b in net cash and a decent-looking balance sheet. So we are not troubled with Anhui Jinhe IndustrialLtd's debt use. 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. Case in point: We've spotted 2 warning signs for Anhui Jinhe IndustrialLtd you should be aware of.

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.