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.' 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. Importantly, ANE (Cayman) Inc. (HKG:9956) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does ANE (Cayman) Carry?

You can click the graphic below for the historical numbers, but it shows that ANE (Cayman) had CN¥568.7m of debt in December 2023, down from CN¥1.04b, one year before. But on the other hand it also has CN¥2.22b in cash, leading to a CN¥1.65b net cash position.

A Look At ANE (Cayman)'s Liabilities

Zooming in on the latest balance sheet data, we can see that ANE (Cayman) had liabilities of CN¥2.16b due within 12 months and liabilities of CN¥646.4m due beyond that. Offsetting these obligations, it had cash of CN¥2.22b as well as receivables valued at CN¥823.7m due within 12 months. So it actually has CN¥236.8m more liquid assets than total liabilities.

This surplus suggests that ANE (Cayman) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ANE (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, ANE (Cayman) turned things around in the last 12 months, delivering and EBIT of CN¥577m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ANE (Cayman)'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ANE (Cayman) 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 year, ANE (Cayman) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case ANE (Cayman) has CN¥1.65b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 239% of that EBIT to free cash flow, bringing in CN¥1.4b. So is ANE (Cayman)'s debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ANE (Cayman)'s earnings per share history for free.

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.