Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Anhui Golden Seed Winery Co., Ltd. (SHSE:600199) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Anhui Golden Seed Winery

What Is Anhui Golden Seed Winery's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Anhui Golden Seed Winery had debt of CN¥29.7m, up from none in one year. However, its balance sheet shows it holds CN¥455.5m in cash, so it actually has CN¥425.7m net cash.

How Strong Is Anhui Golden Seed Winery's Balance Sheet?

According to the last reported balance sheet, Anhui Golden Seed Winery had liabilities of CN¥616.3m due within 12 months, and liabilities of CN¥164.3m due beyond 12 months. Offsetting this, it had CN¥455.5m in cash and CN¥204.8m in receivables that were due within 12 months. So its liabilities total CN¥120.3m more than the combination of its cash and short-term receivables.

Having regard to Anhui Golden Seed Winery's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥15.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Anhui Golden Seed Winery boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Golden Seed Winery 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.

In the last year Anhui Golden Seed Winery wasn't profitable at an EBIT level, but managed to grow its revenue by 6.6%, to CN¥1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Anhui Golden Seed Winery?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Anhui Golden Seed Winery lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥238m and booked a CN¥170m accounting loss. Given it only has net cash of CN¥425.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Anhui Golden Seed Winery's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.