Here's Why Anhui Conch Cement (HKG:914) Can Manage Its Debt Responsibly

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 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. Importantly, Anhui Conch Cement Company Limited (HKG:914) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Anhui Conch Cement

How Much Debt Does Anhui Conch Cement Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Anhui Conch Cement had CN¥20.2b of debt, an increase on CN¥10.1b, over one year. However, it does have CN¥75.0b in cash offsetting this, leading to net cash of CN¥54.8b.

How Strong Is Anhui Conch Cement's Balance Sheet?

The latest balance sheet data shows that Anhui Conch Cement had liabilities of CN¥34.6b due within a year, and liabilities of CN¥9.46b falling due after that. Offsetting these obligations, it had cash of CN¥75.0b as well as receivables valued at CN¥17.1b due within 12 months. So it can boast CN¥48.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that Anhui Conch Cement's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Anhui Conch Cement has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Anhui Conch Cement if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anhui Conch Cement's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Anhui Conch Cement 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. Looking at the most recent three years, Anhui Conch Cement recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Conch Cement has CN¥54.8b in net cash and a decent-looking balance sheet. So we are not troubled with Anhui Conch Cement's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Anhui Conch Cement (including 1 which makes us a bit uncomfortable) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.