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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Anjoy Foods Group Co., Ltd. (SHSE:603345) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Anjoy Foods Group's Net Debt?

The image below, which you can click on for greater detail, shows that Anjoy Foods Group had debt of CN¥231.0m at the end of March 2024, a reduction from CN¥443.3m over a year. But on the other hand it also has CN¥6.55b in cash, leading to a CN¥6.32b net cash position.

How Strong Is Anjoy Foods Group's Balance Sheet?

The latest balance sheet data shows that Anjoy Foods Group had liabilities of CN¥3.64b due within a year, and liabilities of CN¥394.0m falling due after that. Offsetting this, it had CN¥6.55b in cash and CN¥535.1m in receivables that were due within 12 months. So it actually has CN¥3.05b more liquid assets than total liabilities.

This short term liquidity is a sign that Anjoy Foods Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Anjoy Foods Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Anjoy Foods Group grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 Anjoy Foods Group 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. Anjoy Foods Group 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, Anjoy Foods Group's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anjoy Foods Group has net cash of CN¥6.32b, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So is Anjoy Foods Group's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Anjoy Foods Group that you should be aware of.

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.