Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Anhui Expressway Company Limited (HKG:995) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Anhui Expressway

What Is Anhui Expressway's Net Debt?

As you can see below, Anhui Expressway had CN¥3.01b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have CN¥2.65b in cash offsetting this, leading to net debt of about CN¥359.5m.

A Look At Anhui Expressway's Liabilities

We can see from the most recent balance sheet that Anhui Expressway had liabilities of CN¥1.75b falling due within a year, and liabilities of CN¥2.44b due beyond that. On the other hand, it had cash of CN¥2.65b and CN¥197.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.33b.

Of course, Anhui Expressway has a market capitalization of CN¥8.92b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.