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 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. Importantly, Anhui Heli Co.,Ltd. (SHSE:600761) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Anhui HeliLtd's Net Debt?

As you can see below, Anhui HeliLtd had CN¥3.31b of debt at September 2024, down from CN¥4.41b a year prior. However, it does have CN¥6.85b in cash offsetting this, leading to net cash of CN¥3.54b.

How Strong Is Anhui HeliLtd's Balance Sheet?

According to the last reported balance sheet, Anhui HeliLtd had liabilities of CN¥6.18b due within 12 months, and liabilities of CN¥1.71b due beyond 12 months. Offsetting this, it had CN¥6.85b in cash and CN¥2.96b in receivables that were due within 12 months. So it actually has CN¥1.92b more liquid assets than total liabilities.

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

Fortunately, Anhui HeliLtd grew its EBIT by 8.0% in the last year, making that debt load look even more manageable. 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 Anhui HeliLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anhui HeliLtd 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. In the last three years, Anhui HeliLtd's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui HeliLtd has net cash of CN¥3.54b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 8.0% in the last twelve months. So we don't have any problem with Anhui HeliLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Anhui HeliLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.