Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Asia-potash International Investment (Guangzhou)Co.,Ltd. (SZSE:000893) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Asia-potash International Investment (Guangzhou)Co.Ltd

How Much Debt Does Asia-potash International Investment (Guangzhou)Co.Ltd Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Asia-potash International Investment (Guangzhou)Co.Ltd had debt of CN¥72.3m, up from CN¥9.86m in one year. However, it does have CN¥1.03b in cash offsetting this, leading to net cash of CN¥961.2m.

How Strong Is Asia-potash International Investment (Guangzhou)Co.Ltd's Balance Sheet?

The latest balance sheet data shows that Asia-potash International Investment (Guangzhou)Co.Ltd had liabilities of CN¥617.4m due within a year, and liabilities of CN¥158.8m falling due after that. Offsetting this, it had CN¥1.03b in cash and CN¥158.4m in receivables that were due within 12 months. So it actually has CN¥415.7m more liquid assets than total liabilities.

Having regard to Asia-potash International Investment (Guangzhou)Co.Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥25.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Asia-potash International Investment (Guangzhou)Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Asia-potash International Investment (Guangzhou)Co.Ltd grew its EBIT by 838% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Asia-potash International Investment (Guangzhou)Co.Ltd 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. Over the last three years, Asia-potash International Investment (Guangzhou)Co.Ltd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Asia-potash International Investment (Guangzhou)Co.Ltd has CN¥961.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 838% year-on-year EBIT growth. So we are not troubled with Asia-potash International Investment (Guangzhou)Co.Ltd's debt use. 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. Be aware that Asia-potash International Investment (Guangzhou)Co.Ltd is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.