Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Asia-potash International Investment (Guangzhou)Co.,Ltd. (SZSE:000893) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Asia-potash International Investment (Guangzhou)Co.Ltd
How Much Debt Does Asia-potash International Investment (Guangzhou)Co.Ltd Carry?
As you can see below, at the end of September 2023, Asia-potash International Investment (Guangzhou)Co.Ltd had CN¥526.6m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥755.6m in cash to offset that, meaning it has CN¥229.1m net cash.
A Look At Asia-potash International Investment (Guangzhou)Co.Ltd's Liabilities
Zooming in on the latest balance sheet data, we can see that Asia-potash International Investment (Guangzhou)Co.Ltd had liabilities of CN¥1.33b due within 12 months and liabilities of CN¥742.9m due beyond that. Offsetting these obligations, it had cash of CN¥755.6m as well as receivables valued at CN¥45.7m due within 12 months. So its liabilities total CN¥1.27b more than the combination of its cash and short-term receivables.
Of course, Asia-potash International Investment (Guangzhou)Co.Ltd has a market capitalization of CN¥22.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Asia-potash International Investment (Guangzhou)Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Asia-potash International Investment (Guangzhou)Co.Ltd has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asia-potash International Investment (Guangzhou)Co.Ltd can strengthen its balance sheet over time. 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 Asia-potash International Investment (Guangzhou)Co.Ltd 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, Asia-potash International Investment (Guangzhou)Co.Ltd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
We could understand if investors are concerned about Asia-potash International Investment (Guangzhou)Co.Ltd's liabilities, but we can be reassured by the fact it has has net cash of CN¥229.1m. So although we see some areas for improvement, we're not too worried about Asia-potash International Investment (Guangzhou)Co.Ltd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Asia-potash International Investment (Guangzhou)Co.Ltd (1 is a bit concerning) 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.