Is Anhui Conch Cement (HKG:914) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Anhui Conch Cement Company Limited (HKG:914) does carry debt. But is this debt a concern to shareholders?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Anhui Conch Cement

How Much Debt Does Anhui Conch Cement Carry?

As you can see below, at the end of September 2023, Anhui Conch Cement had CN¥26.2b of debt, up from CN¥20.2b a year ago. Click the image for more detail. However, it does have CN¥69.5b in cash offsetting this, leading to net cash of CN¥43.3b.

How Healthy Is Anhui Conch Cement's Balance Sheet?

The latest balance sheet data shows that Anhui Conch Cement had liabilities of CN¥31.1b due within a year, and liabilities of CN¥19.4b falling due after that. On the other hand, it had cash of CN¥69.5b and CN¥20.6b worth of receivables due within a year. So it can boast CN¥39.6b more liquid assets than total liabilities.

This luscious liquidity implies that Anhui Conch Cement's 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, Anhui Conch Cement boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Anhui Conch Cement's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Anhui Conch Cement 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Anhui Conch Cement reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Conch Cement has net cash of CN¥43.3b, as well as more liquid assets than liabilities. So we don't have any problem with Anhui Conch Cement's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Anhui Conch Cement you should know about.

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.