Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Asia Cement (China) Holdings Corporation (HKG:743) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Asia Cement (China) Holdings Carry?

As you can see below, Asia Cement (China) Holdings had CN¥973.0m of debt at June 2024, down from CN¥1.67b a year prior. However, it does have CN¥8.79b in cash offsetting this, leading to net cash of CN¥7.82b.

How Healthy Is Asia Cement (China) Holdings' Balance Sheet?

We can see from the most recent balance sheet that Asia Cement (China) Holdings had liabilities of CN¥1.98b falling due within a year, and liabilities of CN¥598.7m due beyond that. On the other hand, it had cash of CN¥8.79b and CN¥808.9m worth of receivables due within a year. So it actually has CN¥7.02b more liquid assets than total liabilities.

This excess liquidity is a great indication that Asia Cement (China) Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Asia Cement (China) Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asia Cement (China) Holdings 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.

In the last year Asia Cement (China) Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥6.0b. That makes us nervous, to say the least.

So How Risky Is Asia Cement (China) Holdings?

While Asia Cement (China) Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥369m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Asia Cement (China) Holdings has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.