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Does Anglo-Eastern Plantations (LON:AEP) Have A Healthy Balance Sheet?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Anglo-Eastern Plantations Plc (LON:AEP) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anglo-Eastern Plantations

What Is Anglo-Eastern Plantations's Debt?

The image below, which you can click on for greater detail, shows that Anglo-Eastern Plantations had debt of US$2.73m at the end of June 2020, a reduction from US$16.1m over a year. But on the other hand it also has US$91.4m in cash, leading to a US$88.7m net cash position.


How Healthy Is Anglo-Eastern Plantations's Balance Sheet?

The latest balance sheet data shows that Anglo-Eastern Plantations had liabilities of US$25.0m due within a year, and liabilities of US$28.1m falling due after that. Offsetting this, it had US$91.4m in cash and US$56.1m in receivables that were due within 12 months. So it can boast US$94.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Anglo-Eastern Plantations's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Anglo-Eastern Plantations boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Anglo-Eastern Plantations has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Anglo-Eastern Plantations will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Anglo-Eastern Plantations 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 last three years, Anglo-Eastern Plantations reported free cash flow worth 6.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Anglo-Eastern Plantations has net cash of US$88.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 86% year-on-year EBIT growth. So is Anglo-Eastern Plantations'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. For example, we've discovered 1 warning sign for Anglo-Eastern Plantations that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.