Does Sichuan Anning Iron and TitaniumLtd (SZSE:002978) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sichuan Anning Iron and Titanium Co.,Ltd. (SZSE:002978) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 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 Sichuan Anning Iron and TitaniumLtd

How Much Debt Does Sichuan Anning Iron and TitaniumLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sichuan Anning Iron and TitaniumLtd had CN¥405.7m of debt, an increase on CN¥175.0m, over one year. However, it does have CN¥2.61b in cash offsetting this, leading to net cash of CN¥2.20b.

A Look At Sichuan Anning Iron and TitaniumLtd's Liabilities

The latest balance sheet data shows that Sichuan Anning Iron and TitaniumLtd had liabilities of CN¥938.1m due within a year, and liabilities of CN¥232.1m falling due after that. Offsetting this, it had CN¥2.61b in cash and CN¥748.0m in receivables that were due within 12 months. So it actually has CN¥2.18b more liquid assets than total liabilities.

It's good to see that Sichuan Anning Iron and TitaniumLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sichuan Anning Iron and TitaniumLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Sichuan Anning Iron and TitaniumLtd saw its EBIT decline by 4.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sichuan Anning Iron and TitaniumLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sichuan Anning Iron and TitaniumLtd 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, Sichuan Anning Iron and TitaniumLtd recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sichuan Anning Iron and TitaniumLtd has net cash of CN¥2.20b, as well as more liquid assets than liabilities. So we are not troubled with Sichuan Anning Iron and TitaniumLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sichuan Anning Iron and TitaniumLtd (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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