Anker Innovations (SZSE:300866) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Anker Innovations Limited (SZSE:300866) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Anker Innovations

What Is Anker Innovations's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Anker Innovations had debt of CN¥1.21b, up from CN¥1.11b in one year. However, it does have CN¥4.15b in cash offsetting this, leading to net cash of CN¥2.94b.

How Strong Is Anker Innovations' Balance Sheet?

We can see from the most recent balance sheet that Anker Innovations had liabilities of CN¥6.10b falling due within a year, and liabilities of CN¥1.60b due beyond that. Offsetting these obligations, it had cash of CN¥4.15b as well as receivables valued at CN¥1.91b due within 12 months. So it has liabilities totalling CN¥1.63b more than its cash and near-term receivables, combined.

Since publicly traded Anker Innovations shares are worth a total of CN¥53.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Anker Innovations boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Anker Innovations grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Anker Innovations can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Anker Innovations 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. Over the last three years, Anker Innovations recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Anker Innovations's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.94b. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥2.1b. So we don't think Anker Innovations's use of debt is risky. 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. For instance, we've identified 1 warning sign for Anker Innovations that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.