Warren Buffett famously said, '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 note that Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Anhui Guangxin Agrochemical Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Anhui Guangxin Agrochemical had CN¥3.14b of debt, an increase on CN¥1.53b, over one year. However, its balance sheet shows it holds CN¥11.4b in cash, so it actually has CN¥8.23b net cash.

How Strong Is Anhui Guangxin Agrochemical's Balance Sheet?

According to the last reported balance sheet, Anhui Guangxin Agrochemical had liabilities of CN¥6.31b due within 12 months, and liabilities of CN¥110.2m due beyond 12 months. Offsetting this, it had CN¥11.4b in cash and CN¥560.8m in receivables that were due within 12 months. So it can boast CN¥5.51b 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 76% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Anhui Guangxin Agrochemical'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, while the tax-man may adore accounting profits, lenders only accept 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 produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Guangxin Agrochemical has CN¥8.23b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in -CN¥384m. So is Anhui Guangxin Agrochemical's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 2 warning signs we've spotted with Anhui Guangxin Agrochemical (including 1 which is concerning) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.