Health Check: How Prudently Does Advanced Fiber Resources (Zhuhai) (SZSE:300620) Use Debt?

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 note that Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 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 March 2024 Advanced Fiber Resources (Zhuhai) had debt of CN¥153.0m, up from none in one year. However, its balance sheet shows it holds CN¥666.0m in cash, so it actually has CN¥513.0m net cash.

A Look At Advanced Fiber Resources (Zhuhai)'s Liabilities

According to the last reported balance sheet, Advanced Fiber Resources (Zhuhai) had liabilities of CN¥465.0m due within 12 months, and liabilities of CN¥149.1m due beyond 12 months. Offsetting this, it had CN¥666.0m in cash and CN¥321.7m in receivables that were due within 12 months. So it actually has CN¥373.7m 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! 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 Advanced Fiber Resources (Zhuhai)'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.

Over 12 months, Advanced Fiber Resources (Zhuhai) reported revenue of CN¥715m, which is a gain of 8.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Advanced Fiber Resources (Zhuhai)?

Although Advanced Fiber Resources (Zhuhai) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥51m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Advanced Fiber Resources (Zhuhai) 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.