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 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. Importantly, Anhui Conch Cement Company Limited (HKG:914) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Conch Cement
What Is Anhui Conch Cement's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Anhui Conch Cement had CN¥26.2b of debt, an increase on CN¥20.2b, over one year. However, it does have CN¥69.5b in cash offsetting this, leading to net cash of CN¥43.3b.
How Healthy Is Anhui Conch Cement's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Anhui Conch Cement had liabilities of CN¥31.1b due within 12 months and liabilities of CN¥19.4b due beyond that. Offsetting this, it had CN¥69.5b in cash and CN¥20.6b in receivables that were due within 12 months. So it actually has CN¥39.6b more liquid assets than total liabilities.
This surplus strongly suggests that Anhui Conch Cement has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Anhui Conch Cement boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Anhui Conch Cement if management cannot prevent a repeat of the 54% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anhui Conch Cement's ability to maintain a healthy balance sheet going forward. 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. While Anhui Conch Cement 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. Over the last three years, Anhui Conch Cement reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Anhui Conch Cement has CN¥43.3b in net cash and a decent-looking balance sheet. So we don't have any problem with Anhui Conch Cement's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Anhui Conch Cement that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.