These 4 Measures Indicate That Anhui Landun Photoelectron (SZSE:300862) Is Using Debt Extensively

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. We note that Anhui Landun Photoelectron Co., Ltd. (SZSE:300862) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we examine debt levels, we first consider both cash and debt levels, 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¥95.1m of debt at September 2023, down from CN¥120.0m a year prior. But it also has CN¥299.3m in cash to offset that, meaning it has CN¥204.3m 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¥377.5m due within 12 months, and liabilities of CN¥139.2m due beyond 12 months. Offsetting this, it had CN¥299.3m in cash and CN¥638.7m in receivables that were due within 12 months. So it can boast CN¥421.3m more liquid assets than total liabilities.

This surplus suggests that Anhui Landun Photoelectron has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

In fact Anhui Landun Photoelectron's saving grace is its low debt levels, because its EBIT has tanked 85% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Landun Photoelectron has CN¥204.3m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Anhui Landun Photoelectron's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Anhui Landun Photoelectron (at least 1 which is significant) , and understanding them should be part of your investment process.

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.

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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.