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.' 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 Sichuan Anning Iron and Titanium Co.,Ltd. (SZSE:002978) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 June 2024 Sichuan Anning Iron and TitaniumLtd had debt of CN¥426.6m, up from CN¥144.4m in one year. But it also has CN¥2.69b in cash to offset that, meaning it has CN¥2.27b net cash.

A Look At Sichuan Anning Iron and TitaniumLtd's Liabilities

The latest balance sheet data shows that Sichuan Anning Iron and TitaniumLtd had liabilities of CN¥1.03b due within a year, and liabilities of CN¥244.1m falling due after that. Offsetting this, it had CN¥2.69b in cash and CN¥513.3m in receivables that were due within 12 months. So it actually has CN¥1.93b more liquid assets than total liabilities.

This excess liquidity suggests that Sichuan Anning Iron and TitaniumLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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!

The good news is that Sichuan Anning Iron and TitaniumLtd has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sichuan Anning Iron and TitaniumLtd 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. In the last three years, Sichuan Anning Iron and TitaniumLtd's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sichuan Anning Iron and TitaniumLtd has net cash of CN¥2.27b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 6.3% in the last twelve months. So is Sichuan Anning Iron and TitaniumLtd'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. For instance, we've identified 1 warning sign for Sichuan Anning Iron and TitaniumLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.