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.' 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. Importantly, Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Anhui Guangxin Agrochemical

What Is Anhui Guangxin Agrochemical's Debt?

As you can see below, at the end of September 2023, Anhui Guangxin Agrochemical had CN¥2.19b of debt, up from CN¥723.4m a year ago. Click the image for more detail. But on the other hand it also has CN¥9.75b in cash, leading to a CN¥7.56b net cash position.

How Strong Is Anhui Guangxin Agrochemical's Balance Sheet?

We can see from the most recent balance sheet that Anhui Guangxin Agrochemical had liabilities of CN¥5.23b falling due within a year, and liabilities of CN¥137.6m due beyond that. Offsetting these obligations, it had cash of CN¥9.75b as well as receivables valued at CN¥873.0m due within 12 months. So it actually has CN¥5.25b more liquid assets than total liabilities.

This luscious liquidity implies that Anhui Guangxin Agrochemical's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Anhui Guangxin Agrochemical boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Anhui Guangxin Agrochemical's load is not too heavy, because its EBIT was down 27% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anhui Guangxin Agrochemical 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 80% 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 Guangxin Agrochemical has CN¥7.56b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in CN¥1.5b. So is Anhui Guangxin Agrochemical's debt a risk? It doesn't seem so to us. 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 1 warning sign for Anhui Guangxin Agrochemical that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.