Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Yunnan Botanee Bio-Technology GroupLTD's Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Yunnan Botanee Bio-Technology GroupLTD had debt of CN¥170.1m, up from none in one year. However, its balance sheet shows it holds CN¥2.95b in cash, so it actually has CN¥2.78b net cash.
A Look At Yunnan Botanee Bio-Technology GroupLTD's Liabilities
According to the last reported balance sheet, Yunnan Botanee Bio-Technology GroupLTD had liabilities of CN¥743.6m due within 12 months, and liabilities of CN¥207.6m due beyond 12 months. On the other hand, it had cash of CN¥2.95b and CN¥682.5m worth of receivables due within a year. So it actually has CN¥2.69b more liquid assets than total liabilities.
This short term liquidity is a sign that Yunnan Botanee Bio-Technology GroupLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Yunnan Botanee Bio-Technology GroupLTD has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Yunnan Botanee Bio-Technology GroupLTD's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yunnan Botanee Bio-Technology GroupLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yunnan Botanee Bio-Technology GroupLTD 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. Over the most recent three years, Yunnan Botanee Bio-Technology GroupLTD recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Yunnan Botanee Bio-Technology GroupLTD has net cash of CN¥2.78b, as well as more liquid assets than liabilities. So we are not troubled with Yunnan Botanee Bio-Technology GroupLTD's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Yunnan Botanee Bio-Technology GroupLTD is showing 2 warning signs in our investment analysis , you should know about...
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.