We Think Henan Ancai Hi-TechLtd (SHSE:600207) Has A Fair Chunk Of Debt

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.' 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 Henan Ancai Hi-Tech Co.,Ltd (SHSE:600207) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Henan Ancai Hi-TechLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Henan Ancai Hi-TechLtd had debt of CN¥2.31b, up from CN¥1.96b in one year. On the flip side, it has CN¥707.0m in cash leading to net debt of about CN¥1.60b.

How Healthy Is Henan Ancai Hi-TechLtd's Balance Sheet?

According to the last reported balance sheet, Henan Ancai Hi-TechLtd had liabilities of CN¥2.40b due within 12 months, and liabilities of CN¥1.38b due beyond 12 months. On the other hand, it had cash of CN¥707.0m and CN¥1.40b worth of receivables due within a year. So its liabilities total CN¥1.68b more than the combination of its cash and short-term receivables.

Henan Ancai Hi-TechLtd has a market capitalization of CN¥4.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Henan Ancai Hi-TechLtd 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.

See our latest analysis for Henan Ancai Hi-TechLtd

Over 12 months, Henan Ancai Hi-TechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.6b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

While Henan Ancai Hi-TechLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥77m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥721m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Henan Ancai Hi-TechLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.