Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Anhui Transport Consulting & Design Institute Co.,Ltd. (SHSE:603357) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Anhui Transport Consulting & Design InstituteLtd Carry?
As you can see below, at the end of December 2023, Anhui Transport Consulting & Design InstituteLtd had CN¥300.2m of debt, up from CN¥150.1m a year ago. Click the image for more detail. But it also has CN¥1.31b in cash to offset that, meaning it has CN¥1.01b net cash.
How Strong Is Anhui Transport Consulting & Design InstituteLtd's Balance Sheet?
The latest balance sheet data shows that Anhui Transport Consulting & Design InstituteLtd had liabilities of CN¥3.02b due within a year, and liabilities of CN¥15.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.31b as well as receivables valued at CN¥3.97b due within 12 months. So it can boast CN¥2.24b more liquid assets than total liabilities.
This surplus strongly suggests that Anhui Transport Consulting & Design InstituteLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Anhui Transport Consulting & Design InstituteLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Anhui Transport Consulting & Design InstituteLtd grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Anhui Transport Consulting & Design InstituteLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Anhui Transport Consulting & Design InstituteLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Anhui Transport Consulting & Design InstituteLtd recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Anhui Transport Consulting & Design InstituteLtd has net cash of CN¥1.01b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So is Anhui Transport Consulting & Design InstituteLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Anhui Transport Consulting & Design InstituteLtd you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.