We Think Anker Innovations (SZSE:300866) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Anker Innovations Limited (SZSE:300866) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Anker Innovations

What Is Anker Innovations's Net Debt?

As you can see below, at the end of March 2024, Anker Innovations had CN¥1.19b of debt, up from CN¥933.3m a year ago. Click the image for more detail. But it also has CN¥3.98b in cash to offset that, meaning it has CN¥2.79b net cash.

How Strong Is Anker Innovations' Balance Sheet?

We can see from the most recent balance sheet that Anker Innovations had liabilities of CN¥3.41b falling due within a year, and liabilities of CN¥1.38b due beyond that. Offsetting these obligations, it had cash of CN¥3.98b as well as receivables valued at CN¥1.48b due within 12 months. So it can boast CN¥665.2m more liquid assets than total liabilities.

This surplus suggests that Anker Innovations has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Anker Innovations has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Anker Innovations grew its EBIT by 64% 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 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. Anker Innovations 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. During the last three years, Anker Innovations produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anker Innovations has net cash of CN¥2.79b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 64% over the last year. So we don't think Anker Innovations's use of debt is risky. 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. For instance, we've identified 1 warning sign for Anker Innovations that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.