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

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.' 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 Sichuan Anning Iron and Titanium Co.,Ltd. (SZSE:002978) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider 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?

As you can see below, at the end of September 2024, Sichuan Anning Iron and TitaniumLtd had CN¥514.8m of debt, up from CN¥182.2m a year ago. Click the image for more detail. However, it does have CN¥2.62b in cash offsetting this, leading to net cash of CN¥2.10b.

How Strong Is Sichuan Anning Iron and TitaniumLtd's Balance Sheet?

The latest balance sheet data shows that Sichuan Anning Iron and TitaniumLtd had liabilities of CN¥1.13b due within a year, and liabilities of CN¥239.2m falling due after that. On the other hand, it had cash of CN¥2.62b and CN¥396.5m worth of receivables due within a year. So it actually has CN¥1.64b more liquid assets than total liabilities.

This surplus suggests that Sichuan Anning Iron and TitaniumLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

While Sichuan Anning Iron and TitaniumLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Sichuan Anning Iron and TitaniumLtd'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 company can only pay off debt with cold hard cash, not accounting profits. 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 32% 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 Sichuan Anning Iron and TitaniumLtd has net cash of CN¥2.10b, as well as more liquid assets than liabilities. So we don't have any problem with Sichuan Anning Iron and TitaniumLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Sichuan Anning Iron and TitaniumLtd (including 1 which is significant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.