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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Anhui Expressway

How Much Debt Does Anhui Expressway Carry?

As you can see below, at the end of September 2021, Anhui Expressway had CN¥3.78b of debt, up from CN¥2.89b a year ago. Click the image for more detail. However, it does have CN¥5.23b in cash offsetting this, leading to net cash of CN¥1.45b.

How Healthy Is Anhui Expressway's Balance Sheet?

According to the last reported balance sheet, Anhui Expressway had liabilities of CN¥1.44b due within 12 months, and liabilities of CN¥3.65b due beyond 12 months. Offsetting this, it had CN¥5.23b in cash and CN¥199.7m in receivables that were due within 12 months. So it actually has CN¥339.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Anhui Expressway could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Anhui Expressway boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Anhui Expressway grew its EBIT by 107% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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 company can only pay off debt with cold hard cash, not accounting profits. While Anhui Expressway has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Anhui Expressway produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Expressway has net cash of CN¥1.45b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 107% over the last year. 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.

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.