Does Advanced Fiber Resources (Zhuhai) (SZSE:300620) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Advanced Fiber Resources (Zhuhai)

What Is Advanced Fiber Resources (Zhuhai)'s Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Advanced Fiber Resources (Zhuhai) had debt of CN¥191.5m, up from none in one year. However, it does have CN¥632.3m in cash offsetting this, leading to net cash of CN¥440.7m.

How Healthy Is Advanced Fiber Resources (Zhuhai)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Advanced Fiber Resources (Zhuhai) had liabilities of CN¥501.7m due within 12 months and liabilities of CN¥177.6m due beyond that. On the other hand, it had cash of CN¥632.3m and CN¥399.5m worth of receivables due within a year. So it can boast CN¥352.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Advanced Fiber Resources (Zhuhai) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Advanced Fiber Resources (Zhuhai) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Advanced Fiber Resources (Zhuhai) grew its EBIT by 306% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Advanced Fiber Resources (Zhuhai)'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. While Advanced Fiber Resources (Zhuhai) 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. During the last three years, Advanced Fiber Resources (Zhuhai) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Advanced Fiber Resources (Zhuhai) has net cash of CN¥440.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 306% over the last year. So we don't have any problem with Advanced Fiber Resources (Zhuhai)'s use of debt. 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. Be aware that Advanced Fiber Resources (Zhuhai) is showing 2 warning signs in our investment analysis , you should know about...

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.