Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Zhejiang Yongtai Technology Co.,Ltd. (SZSE:002326) does carry debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Zhejiang Yongtai TechnologyLtd
What Is Zhejiang Yongtai TechnologyLtd's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Zhejiang Yongtai TechnologyLtd had debt of CN¥4.24b, up from CN¥3.34b in one year. However, because it has a cash reserve of CN¥1.36b, its net debt is less, at about CN¥2.89b.
A Look At Zhejiang Yongtai TechnologyLtd's Liabilities
According to the last reported balance sheet, Zhejiang Yongtai TechnologyLtd had liabilities of CN¥5.07b due within 12 months, and liabilities of CN¥2.51b due beyond 12 months. On the other hand, it had cash of CN¥1.36b and CN¥938.6m worth of receivables due within a year. So it has liabilities totalling CN¥5.28b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Zhejiang Yongtai TechnologyLtd is worth CN¥11.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Zhejiang Yongtai TechnologyLtd 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.
Over 12 months, Zhejiang Yongtai TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.6b, which is a fall of 25%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Zhejiang Yongtai TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥93m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥737m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Zhejiang Yongtai TechnologyLtd has 4 warning signs (and 3 which can't be ignored) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.