Ajisen (China) Holdings (HKG:538) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ajisen (China) Holdings Limited (HKG:538) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Ajisen (China) Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Ajisen (China) Holdings had CN¥34.9m of debt in December 2024, down from CN¥37.8m, one year before. But it also has CN¥1.64b in cash to offset that, meaning it has CN¥1.60b net cash.

A Look At Ajisen (China) Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Ajisen (China) Holdings had liabilities of CN¥508.7m due within 12 months and liabilities of CN¥511.2m due beyond that. On the other hand, it had cash of CN¥1.64b and CN¥29.9m worth of receivables due within a year. So it can boast CN¥649.7m more liquid assets than total liabilities.

This luscious liquidity implies that Ajisen (China) Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Ajisen (China) Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Ajisen (China) Holdings

The modesty of its debt load may become crucial for Ajisen (China) Holdings if management cannot prevent a repeat of the 88% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Ajisen (China) Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ajisen (China) Holdings 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 two years, Ajisen (China) Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ajisen (China) Holdings has net cash of CN¥1.60b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥319m, being 535% of its EBIT. So we don't think Ajisen (China) Holdings'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ajisen (China) Holdings you should know about.

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.