Anhui Landun Photoelectron (SZSE:300862) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Anhui Landun Photoelectron Co., Ltd. (SZSE:300862) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Anhui Landun Photoelectron

What Is Anhui Landun Photoelectron's Net Debt?

As you can see below, Anhui Landun Photoelectron had CN¥121.6m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥310.9m in cash to offset that, meaning it has CN¥189.3m net cash.

How Healthy Is Anhui Landun Photoelectron's Balance Sheet?

According to the last reported balance sheet, Anhui Landun Photoelectron had liabilities of CN¥431.0m due within 12 months, and liabilities of CN¥114.9m due beyond 12 months. Offsetting this, it had CN¥310.9m in cash and CN¥525.2m in receivables that were due within 12 months. So it can boast CN¥290.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Anhui Landun Photoelectron could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anhui Landun Photoelectron has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Anhui Landun Photoelectron's load is not too heavy, because its EBIT was down 49% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Anhui Landun Photoelectron will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Anhui Landun Photoelectron may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Anhui Landun Photoelectron saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Landun Photoelectron has net cash of CN¥189.3m, as well as more liquid assets than liabilities. So while Anhui Landun Photoelectron does not have a great balance sheet, it's certainly not too bad. 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. We've identified 2 warning signs with Anhui Landun Photoelectron (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

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