Is Anhui Landun Photoelectron (SZSE:300862) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Anhui Landun Photoelectron Co., Ltd. (SZSE:300862) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Anhui Landun Photoelectron's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui Landun Photoelectron had debt of CN¥210.8m, up from CN¥95.1m in one year. However, it does have CN¥314.3m in cash offsetting this, leading to net cash of CN¥103.5m.

How Healthy Is Anhui Landun Photoelectron's Balance Sheet?

According to the last reported balance sheet, Anhui Landun Photoelectron had liabilities of CN¥404.8m due within 12 months, and liabilities of CN¥181.9m due beyond 12 months. On the other hand, it had cash of CN¥314.3m and CN¥687.2m worth of receivables due within a year. So it can boast CN¥414.8m 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. Succinctly put, Anhui Landun Photoelectron boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Anhui Landun Photoelectron's earnings that will influence how the balance sheet holds up in the future. 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.

View our latest analysis for Anhui Landun Photoelectron

Over 12 months, Anhui Landun Photoelectron made a loss at the EBIT level, and saw its revenue drop to CN¥565m, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Anhui Landun Photoelectron?

Although Anhui Landun Photoelectron had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥16m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Anhui Landun Photoelectron (1 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.