Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Asian Star Anchor Chain Co., Ltd. Jiangsu (SHSE:601890) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Asian Star Anchor Chain Jiangsu's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Asian Star Anchor Chain Jiangsu had debt of CN¥691.6m, up from CN¥456.4m in one year. But on the other hand it also has CN¥2.58b in cash, leading to a CN¥1.89b net cash position.

How Healthy Is Asian Star Anchor Chain Jiangsu's Balance Sheet?

The latest balance sheet data shows that Asian Star Anchor Chain Jiangsu had liabilities of CN¥885.3m due within a year, and liabilities of CN¥514.2m falling due after that. Offsetting this, it had CN¥2.58b in cash and CN¥622.1m in receivables that were due within 12 months. So it can boast CN¥1.80b more liquid assets than total liabilities.

This excess liquidity suggests that Asian Star Anchor Chain Jiangsu is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Asian Star Anchor Chain Jiangsu boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Asian Star Anchor Chain Jiangsu grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asian Star Anchor Chain Jiangsu can strengthen its balance sheet over time. 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 Asian Star Anchor Chain Jiangsu 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, Asian Star Anchor Chain Jiangsu recorded free cash flow worth 62% 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 it is always sensible to investigate a company's debt, in this case Asian Star Anchor Chain Jiangsu has CN¥1.89b in net cash and a decent-looking balance sheet. So we don't think Asian Star Anchor Chain Jiangsu's use of debt is risky. 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. We've identified 1 warning sign with Asian Star Anchor Chain Jiangsu , and understanding them should be part of your investment process.

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.