David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Guangxin Agrochemical

How Much Debt Does Anhui Guangxin Agrochemical Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Anhui Guangxin Agrochemical had CN¥723.4m of debt, an increase on none, over one year. But on the other hand it also has CN¥7.71b in cash, leading to a CN¥6.99b net cash position.

A Look At Anhui Guangxin Agrochemical's Liabilities

The latest balance sheet data shows that Anhui Guangxin Agrochemical had liabilities of CN¥3.85b due within a year, and liabilities of CN¥130.7m falling due after that. On the other hand, it had cash of CN¥7.71b and CN¥606.0m worth of receivables due within a year. So it actually has CN¥4.34b more liquid assets than total liabilities.

This surplus suggests that Anhui Guangxin Agrochemical is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble 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.

Better yet, Anhui Guangxin Agrochemical grew its EBIT by 105% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Anhui Guangxin Agrochemical recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Guangxin Agrochemical has CN¥6.99b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN¥1.7b. When it comes to Anhui Guangxin Agrochemical's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Anhui Guangxin Agrochemical (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.