Warren Buffett famously said, '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. We can see that Anhui Gujing Distillery Co., Ltd. (SZSE:000596) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
View our latest analysis for Anhui Gujing Distillery
How Much Debt Does Anhui Gujing Distillery Carry?
As you can see below, Anhui Gujing Distillery had CN¥106.7m of debt at March 2023, down from CN¥222.4m a year prior. But on the other hand it also has CN¥18.1b in cash, leading to a CN¥18.0b net cash position.
A Look At Anhui Gujing Distillery's Liabilities
The latest balance sheet data shows that Anhui Gujing Distillery had liabilities of CN¥14.9b due within a year, and liabilities of CN¥510.4m falling due after that. Offsetting this, it had CN¥18.1b in cash and CN¥3.77b in receivables that were due within 12 months. So it actually has CN¥6.43b more liquid assets than total liabilities.
This surplus suggests that Anhui Gujing Distillery has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Anhui Gujing Distillery boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Anhui Gujing Distillery grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. 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 Gujing Distillery'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Anhui Gujing Distillery 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. During the last three years, Anhui Gujing Distillery generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to investigate a company's debt, in this case Anhui Gujing Distillery has CN¥18.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 100% of its EBIT. So we don't think Anhui Gujing Distillery's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Anhui Gujing Distillery (1 is concerning!) 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.