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 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 Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Advanced Fiber Resources (Zhuhai)'s Net Debt?

As you can see below, at the end of March 2024, Advanced Fiber Resources (Zhuhai) had CN¥153.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥666.0m in cash, so it actually has CN¥513.0m net cash.

How Strong Is Advanced Fiber Resources (Zhuhai)'s Balance Sheet?

We can see from the most recent balance sheet that Advanced Fiber Resources (Zhuhai) had liabilities of CN¥465.0m falling due within a year, and liabilities of CN¥149.1m due beyond that. Offsetting these obligations, it had cash of CN¥666.0m as well as receivables valued at CN¥321.7m due within 12 months. So it can boast CN¥373.7m more liquid assets than total liabilities.

This surplus suggests that Advanced Fiber Resources (Zhuhai) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Advanced Fiber Resources (Zhuhai) has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Advanced Fiber Resources (Zhuhai)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Advanced Fiber Resources (Zhuhai) wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to CN¥715m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Advanced Fiber Resources (Zhuhai)?

Although Advanced Fiber Resources (Zhuhai) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥51m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that Advanced Fiber Resources (Zhuhai) is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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