The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Anhui Yingjia Distillery Co., Ltd. (SHSE:603198) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Anhui Yingjia Distillery's Net Debt?

The image below, which you can click on for greater detail, shows that Anhui Yingjia Distillery had debt of CN¥12.8m at the end of September 2024, a reduction from CN¥21.2m over a year. But on the other hand it also has CN¥3.63b in cash, leading to a CN¥3.62b net cash position.

How Strong Is Anhui Yingjia Distillery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Yingjia Distillery had liabilities of CN¥2.62b due within 12 months and liabilities of CN¥150.7m due beyond that. Offsetting these obligations, it had cash of CN¥3.63b as well as receivables valued at CN¥84.7m due within 12 months. So it can boast CN¥944.2m more liquid assets than total liabilities.

Having regard to Anhui Yingjia Distillery's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥52.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Anhui Yingjia Distillery boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Anhui Yingjia Distillery has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Anhui Yingjia Distillery'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 Yingjia Distillery 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. Over the most recent three years, Anhui Yingjia Distillery recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Yingjia Distillery has net cash of CN¥3.62b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So is Anhui Yingjia Distillery's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Anhui Yingjia Distillery's earnings per share history for free.

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.