Warren Buffett famously said, '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. We note that Anhui Hengyuan Coal Industry and Electricity Power Co.,Ltd (SHSE:600971) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Anhui Hengyuan Coal Industry and Electricity PowerLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Anhui Hengyuan Coal Industry and Electricity PowerLtd had debt of CN¥1.96b, up from CN¥1.69b in one year. However, its balance sheet shows it holds CN¥7.46b in cash, so it actually has CN¥5.50b net cash.

A Look At Anhui Hengyuan Coal Industry and Electricity PowerLtd's Liabilities

We can see from the most recent balance sheet that Anhui Hengyuan Coal Industry and Electricity PowerLtd had liabilities of CN¥5.84b falling due within a year, and liabilities of CN¥2.51b due beyond that. On the other hand, it had cash of CN¥7.46b and CN¥1.96b worth of receivables due within a year. So it can boast CN¥1.07b more liquid assets than total liabilities.

This surplus suggests that Anhui Hengyuan Coal Industry and Electricity PowerLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Anhui Hengyuan Coal Industry and Electricity PowerLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Anhui Hengyuan Coal Industry and Electricity PowerLtd if management cannot prevent a repeat of the 35% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Hengyuan Coal Industry and Electricity PowerLtd'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. While Anhui Hengyuan Coal Industry and Electricity PowerLtd 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. Over the last three years, Anhui Hengyuan Coal Industry and Electricity PowerLtd recorded free cash flow worth a fulsome 91% 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 Hengyuan Coal Industry and Electricity PowerLtd has CN¥5.50b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.0b, being 91% of its EBIT. So we are not troubled with Anhui Hengyuan Coal Industry and Electricity PowerLtd's debt use. 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. For example, we've discovered 1 warning sign for Anhui Hengyuan Coal Industry and Electricity PowerLtd 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.