These 4 Measures Indicate That Anker Innovations (SZSE:300866) Is Using Debt Safely

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Anker Innovations Limited (SZSE:300866) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Anker Innovations

What Is Anker Innovations's Debt?

As you can see below, at the end of September 2024, Anker Innovations had CN¥1.21b of debt, up from CN¥1.11b a year ago. Click the image for more detail. But on the other hand it also has CN¥4.15b in cash, leading to a CN¥2.94b net cash position.

How Healthy Is Anker Innovations' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anker Innovations had liabilities of CN¥6.10b due within 12 months and liabilities of CN¥1.60b due beyond that. On the other hand, it had cash of CN¥4.15b and CN¥1.91b worth of receivables due within a year. So its liabilities total CN¥1.63b more than the combination of its cash and short-term receivables.

Since publicly traded Anker Innovations shares are worth a total of CN¥46.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Anker Innovations also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Anker Innovations has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 puts it in a very strong position to pay down debt.

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. And it impressed us with free cash flow of CN¥2.1b, being 88% of its EBIT. So is Anker Innovations's debt a risk? It doesn't seem so to us. 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 1 warning sign with Anker Innovations , 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.