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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Yintai Gold Co., Ltd. (SZSE:000975) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Yintai Gold
What Is Yintai Gold's Net Debt?
The chart below, which you can click on for greater detail, shows that Yintai Gold had CN¥619.2m in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds CN¥4.07b in cash, so it actually has CN¥3.45b net cash.
A Look At Yintai Gold's Liabilities
The latest balance sheet data shows that Yintai Gold had liabilities of CN¥2.29b due within a year, and liabilities of CN¥509.9m falling due after that. Offsetting these obligations, it had cash of CN¥4.07b as well as receivables valued at CN¥116.6m due within 12 months. So it actually has CN¥1.39b more liquid assets than total liabilities.
This surplus suggests that Yintai Gold has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yintai Gold boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Yintai Gold grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yintai Gold's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yintai Gold 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. During the last three years, Yintai Gold generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to investigate a company's debt, in this case Yintai Gold has CN¥3.45b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.5b, being 87% of its EBIT. So we don't think Yintai Gold's use of debt is 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. Case in point: We've spotted 1 warning sign for Yintai Gold you should be aware of.
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.
