Is Anhui Expressway (HKG:995) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Anhui Expressway Company Limited (HKG:995) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Anhui Expressway

What Is Anhui Expressway's Net Debt?

As you can see below, at the end of March 2021, Anhui Expressway had CN¥3.77b of debt, up from CN¥2.91b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.63b in cash, so it actually has CN¥858.6m net cash.

A Look At Anhui Expressway's Liabilities

According to the last reported balance sheet, Anhui Expressway had liabilities of CN¥1.64b due within 12 months, and liabilities of CN¥3.43b due beyond 12 months. On the other hand, it had cash of CN¥4.63b and CN¥201.3m worth of receivables due within a year. So its liabilities total CN¥231.0m more than the combination of its cash and short-term receivables.

Of course, Anhui Expressway has a market capitalization of CN¥10.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Anhui Expressway boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Anhui Expressway grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Expressway'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 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. Over the most recent three years, Anhui Expressway recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Anhui Expressway's liabilities, but we can be reassured by the fact it has has net cash of CN¥858.6m. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't think Anhui Expressway's use of debt is risky. Given Anhui Expressway has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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. 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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