Does Anhui Expressway (HKG:995) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Anhui Expressway Company Limited (HKG:995) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Expressway

How Much Debt Does Anhui Expressway Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Anhui Expressway had debt of CN¥2.89b, up from CN¥2.75b in one year. But it also has CN¥3.03b in cash to offset that, meaning it has CN¥140.5m net cash.

How Healthy Is Anhui Expressway's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Expressway had liabilities of CN¥2.29b due within 12 months and liabilities of CN¥2.23b due beyond that. Offsetting this, it had CN¥3.03b in cash and CN¥209.0m in receivables that were due within 12 months. So its liabilities total CN¥1.28b more than the combination of its cash and short-term receivables.

Of course, Anhui Expressway has a market capitalization of CN¥8.86b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Anhui Expressway boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Anhui Expressway's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anhui Expressway can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Anhui Expressway 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. In the last three years, Anhui Expressway's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Anhui Expressway's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥140.5m. So we don't have any problem with Anhui Expressway's use of debt. 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. For example, we've discovered 1 warning sign for Anhui Expressway that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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