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.' 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 Guofeng New Materials Co., Ltd. (SZSE:000859) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Anhui Guofeng New Materials's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Anhui Guofeng New Materials had CN¥128.7m of debt, an increase on CN¥88.9m, over one year. But on the other hand it also has CN¥487.7m in cash, leading to a CN¥359.0m net cash position.
A Look At Anhui Guofeng New Materials' Liabilities
We can see from the most recent balance sheet that Anhui Guofeng New Materials had liabilities of CN¥656.7m falling due within a year, and liabilities of CN¥216.9m due beyond that. On the other hand, it had cash of CN¥487.7m and CN¥483.2m worth of receivables due within a year. So it can boast CN¥97.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Anhui Guofeng New Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anhui Guofeng New Materials has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anhui Guofeng New Materials will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Anhui Guofeng New Materials's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Anhui Guofeng New Materials?
While Anhui Guofeng New Materials lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥34m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Anhui Guofeng New Materials , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.