Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sichuan Anning Iron and Titanium Co.,Ltd. (SZSE:002978) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sichuan Anning Iron and TitaniumLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sichuan Anning Iron and TitaniumLtd had debt of CN¥405.7m, up from CN¥175.0m in one year. However, it does have CN¥2.61b in cash offsetting this, leading to net cash of CN¥2.20b.

How Healthy Is Sichuan Anning Iron and TitaniumLtd's Balance Sheet?

The latest balance sheet data shows that Sichuan Anning Iron and TitaniumLtd had liabilities of CN¥938.1m due within a year, and liabilities of CN¥232.1m falling due after that. Offsetting these obligations, it had cash of CN¥2.61b as well as receivables valued at CN¥748.0m due within 12 months. So it actually has CN¥2.18b more liquid assets than total liabilities.

This excess liquidity suggests that Sichuan Anning Iron and TitaniumLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Sichuan Anning Iron and TitaniumLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Sichuan Anning Iron and TitaniumLtd saw its EBIT decline by 4.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sichuan Anning Iron and TitaniumLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sichuan Anning Iron and TitaniumLtd 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. Looking at the most recent three years, Sichuan Anning Iron and TitaniumLtd recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sichuan Anning Iron and TitaniumLtd has CN¥2.20b in net cash and a decent-looking balance sheet. So we are not troubled with Sichuan Anning Iron and TitaniumLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sichuan Anning Iron and TitaniumLtd (1 makes us a bit uncomfortable) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com