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 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 Yimikang Tech.Group Co., Ltd. (SZSE:300249) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Yimikang Tech.Group
What Is Yimikang Tech.Group's Debt?
The image below, which you can click on for greater detail, shows that Yimikang Tech.Group had debt of CN¥554.2m at the end of June 2023, a reduction from CN¥967.0m over a year. However, it does have CN¥93.1m in cash offsetting this, leading to net debt of about CN¥461.2m.
How Strong Is Yimikang Tech.Group's Balance Sheet?
According to the last reported balance sheet, Yimikang Tech.Group had liabilities of CN¥1.25b due within 12 months, and liabilities of CN¥162.3m due beyond 12 months. On the other hand, it had cash of CN¥93.1m and CN¥885.4m worth of receivables due within a year. So its liabilities total CN¥431.3m more than the combination of its cash and short-term receivables.
Given Yimikang Tech.Group has a market capitalization of CN¥4.22b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yimikang Tech.Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Yimikang Tech.Group had a loss before interest and tax, and actually shrunk its revenue by 48%, to CN¥708m. To be frank that doesn't bode well.
Caveat Emptor
While Yimikang Tech.Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥132m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥121m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Yimikang Tech.Group you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
