Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Anhui Transport Consulting & Design Institute Co.,Ltd. (SHSE:603357) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Anhui Transport Consulting & Design InstituteLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Anhui Transport Consulting & Design InstituteLtd had CN¥500.3m of debt, an increase on CN¥250.0m, over one year. But on the other hand it also has CN¥766.5m in cash, leading to a CN¥266.2m net cash position.

A Look At Anhui Transport Consulting & Design InstituteLtd's Liabilities

We can see from the most recent balance sheet that Anhui Transport Consulting & Design InstituteLtd had liabilities of CN¥2.90b falling due within a year, and liabilities of CN¥13.1m due beyond that. On the other hand, it had cash of CN¥766.5m and CN¥4.53b worth of receivables due within a year. So it can boast CN¥2.38b more liquid assets than total liabilities.

This luscious liquidity implies that Anhui Transport Consulting & Design InstituteLtd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Anhui Transport Consulting & Design InstituteLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Anhui Transport Consulting & Design InstituteLtd saw its EBIT decline by 7.9% 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 Anhui Transport Consulting & Design InstituteLtd 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. Anhui Transport Consulting & Design InstituteLtd 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. In the last three years, Anhui Transport Consulting & Design InstituteLtd created free cash flow amounting to 9.7% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Transport Consulting & Design InstituteLtd has net cash of CN¥266.2m, as well as more liquid assets than liabilities. So we are not troubled with Anhui Transport Consulting & Design InstituteLtd'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. To that end, you should be aware of the 1 warning sign we've spotted with Anhui Transport Consulting & Design InstituteLtd .

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.