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 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. As with many other companies Antong Holdings Co., Ltd. (SHSE:600179) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Antong Holdings's Net Debt?

As you can see below, at the end of March 2024, Antong Holdings had CN¥1.29b of debt, up from CN¥756.0m a year ago. Click the image for more detail. However, it does have CN¥4.41b in cash offsetting this, leading to net cash of CN¥3.12b.

How Healthy Is Antong Holdings' Balance Sheet?

According to the last reported balance sheet, Antong Holdings had liabilities of CN¥2.76b due within 12 months, and liabilities of CN¥1.06b due beyond 12 months. On the other hand, it had cash of CN¥4.41b and CN¥584.3m worth of receivables due within a year. So it actually has CN¥1.17b more liquid assets than total liabilities.

This surplus suggests that Antong Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Antong Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Antong Holdings's saving grace is its low debt levels, because its EBIT has tanked 81% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Antong Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Antong Holdings 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. Happily for any shareholders, Antong Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Antong Holdings has CN¥3.12b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥724m, being 126% of its EBIT. So we are not troubled with Antong Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Antong Holdings you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.