We believe Ausnutria Dairy (HKG: 1717) can stay on top of its debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Ausnutria Dairy Corporation Ltd (HKG: 1717) has debt on its balance sheet. But does this debt concern shareholders?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Ausnutria Dairy
How much debt is Ausnutria Dairy?
You can click on the graph below for historical figures, but it shows that as of June 2021, Ausnutria Dairy had a debt of CNN 984.4 million, an increase from CN’s 851.1 million, on a year. But it also has CN 1.43 billion in cash to make up for that, which means it has a net cash of CN 444.5 million.
A look at the responsibilities of Ausnutria Dairy
The latest balance sheet data shows that Ausnutria Dairy had debts of CN 3.15 billion maturing within one year, and debts of CN 613.8 million maturing thereafter. In compensation for these obligations, he had cash of CND 1.43 billion as well as receivables valued at CN 506.8 million due within 12 months. Its liabilities are therefore CN 1.83 billion more than the combination of its cash and short-term receivables.
Considering that Ausnutria Dairy has a market capitalization of CND 9.40 billion, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While she has some liabilities to note, Ausnutria Dairy also has more cash than debt, so we’re pretty confident that she can handle her debt safely.
On the other hand, Ausnutria Dairy’s EBIT plunged 15% compared to last year. We believe that this type of performance, if repeated frequently, could well cause difficulties for the title. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Ausnutria Dairy’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. Ausnutria Dairy may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Ausnutria Dairy’s free cash flow has been 39% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Although Ausnutria Dairy’s balance sheet is not particularly strong, due to total liabilities it is clearly positive that it has net cash of CND 444.5 million. So we have no problem with the use of debt by Ausnutria Dairy. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Ausnutria Dairy (1 of which should not be ignored!) that you should know.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
When trading stocks or any other investment, use the platform seen by many as the professionals’ gateway to the global market, Interactive brokers. You get the cheapest * transactions in stocks, options, futures, forex, bonds and funds from around the world from one integrated account. Promoted
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.