These 4 Measures Indicate That Anhui Conch Cement (HKG:914) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Anhui Conch Cement Company Limited (HKG:914) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider 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 June 2023 Anhui Conch Cement had CN¥24.1b of debt, an increase on CN¥20.5b, over one year. But on the other hand it also has CN¥63.9b in cash, leading to a CN¥39.8b net cash position.

A Look At Anhui Conch Cement's Liabilities

Zooming in on the latest balance sheet data, we can see that Anhui Conch Cement had liabilities of CN¥32.4b due within 12 months and liabilities of CN¥14.2b due beyond that. Offsetting this, it had CN¥63.9b in cash and CN¥21.0b in receivables that were due within 12 months. So it can boast CN¥38.3b more liquid assets than total liabilities.

This luscious liquidity implies that Anhui Conch Cement's balance sheet is sturdy like a giant sequoia tree. 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.

It is just as well that Anhui Conch Cement's load is not too heavy, because its EBIT was down 60% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

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 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Conch Cement has CN¥39.8b in net cash and a decent-looking balance sheet. So we don't have any problem with Anhui Conch Cement's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Anhui Conch Cement 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.

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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.