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.' 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. Importantly, Jiangsu Yunyi Electric Co.,Ltd. (SZSE:300304) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
What Is Jiangsu Yunyi ElectricLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Yunyi ElectricLtd had CN¥120.0m of debt, an increase on CN¥79.1m, over one year. However, it does have CN¥1.74b in cash offsetting this, leading to net cash of CN¥1.62b.
![debt-equity-history-analysis](https://usnewsfile.moomoo.com/public/MM-PersistNewsContentImage/7781/20240621/0-b147912e3a433c07138f0a223e17a1f3-0-340e6aa51c9562e3b56c3095d5fbd283.png/big)
How Strong Is Jiangsu Yunyi ElectricLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangsu Yunyi ElectricLtd had liabilities of CN¥776.9m due within 12 months and liabilities of CN¥123.2m due beyond that. On the other hand, it had cash of CN¥1.74b and CN¥598.7m worth of receivables due within a year. So it can boast CN¥1.44b more liquid assets than total liabilities.
This excess liquidity suggests that Jiangsu Yunyi ElectricLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Jiangsu Yunyi ElectricLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Jiangsu Yunyi ElectricLtd grew its EBIT by 134% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Yunyi ElectricLtd's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu Yunyi ElectricLtd 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. Looking at the most recent three years, Jiangsu Yunyi ElectricLtd recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Yunyi ElectricLtd has net cash of CN¥1.62b, as well as more liquid assets than liabilities. And we liked the look of last year's 134% year-on-year EBIT growth. So we don't think Jiangsu Yunyi ElectricLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Jiangsu Yunyi ElectricLtd (1 is concerning) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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