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. We can see that Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Anhui Guangxin Agrochemical

How Much Debt Does Anhui Guangxin Agrochemical Carry?

As you can see below, at the end of June 2022, Anhui Guangxin Agrochemical had CN¥535.3m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥6.55b in cash, leading to a CN¥6.02b net cash position.

How Healthy Is Anhui Guangxin Agrochemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Guangxin Agrochemical had liabilities of CN¥3.51b due within 12 months and liabilities of CN¥133.2m due beyond that. Offsetting this, it had CN¥6.55b in cash and CN¥723.3m in receivables that were due within 12 months. So it can boast CN¥3.64b more liquid assets than total liabilities.

This excess liquidity suggests that Anhui Guangxin Agrochemical is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Anhui Guangxin Agrochemical boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Anhui Guangxin Agrochemical grew its EBIT by 131% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Anhui Guangxin Agrochemical'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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Anhui Guangxin Agrochemical generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥6.02b, as well as more liquid assets than liabilities. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥1.9b. When it comes to Anhui Guangxin Agrochemical's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example - Anhui Guangxin Agrochemical has 1 warning sign we think you should be aware of.

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.