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.' 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. Importantly, ANE (Cayman) Inc. (HKG:9956) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does ANE (Cayman) Carry?

As you can see below, ANE (Cayman) had CN¥236.2m of debt at June 2024, down from CN¥707.2m a year prior. But it also has CN¥2.22b in cash to offset that, meaning it has CN¥1.99b net cash.

How Strong Is ANE (Cayman)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ANE (Cayman) had liabilities of CN¥2.00b due within 12 months and liabilities of CN¥535.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.22b as well as receivables valued at CN¥887.5m due within 12 months. So it actually has CN¥578.1m more liquid assets than total liabilities.

This surplus suggests that ANE (Cayman) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ANE (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, ANE (Cayman) grew its EBIT by 211% last year, which is an impressive improvement. 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 ANE (Cayman) 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. While ANE (Cayman) 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. Happily for any shareholders, ANE (Cayman) actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case ANE (Cayman) has CN¥1.99b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.4b, being 224% of its EBIT. So we don't think ANE (Cayman)'s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in ANE (Cayman), you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.