Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Guangxin Agrochemical Co., Ltd. (SHSE:603599) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Anhui Guangxin Agrochemical

What Is Anhui Guangxin Agrochemical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Anhui Guangxin Agrochemical had CN¥1.53b of debt, an increase on CN¥535.3m, over one year. But it also has CN¥9.67b in cash to offset that, meaning it has CN¥8.13b net cash.

How Strong Is Anhui Guangxin Agrochemical's Balance Sheet?

The latest balance sheet data shows that Anhui Guangxin Agrochemical had liabilities of CN¥5.04b due within a year, and liabilities of CN¥137.7m falling due after that. Offsetting these obligations, it had cash of CN¥9.67b as well as receivables valued at CN¥666.6m due within 12 months. So it actually has CN¥5.16b more liquid assets than total liabilities.

It's good to see that Anhui Guangxin Agrochemical has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Anhui Guangxin Agrochemical has more cash than debt is arguably a good indication that it can manage its debt safely.

Anhui Guangxin Agrochemical's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Guangxin Agrochemical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Anhui Guangxin Agrochemical 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 Guangxin Agrochemical recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Guangxin Agrochemical has net cash of CN¥8.13b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 81% of its EBIT. So is Anhui Guangxin Agrochemical's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Anhui Guangxin Agrochemical you should know about.

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. 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.