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 can see that Sichuan Yahua Industrial Group Co., Ltd. (SZSE:002497) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 Sichuan Yahua Industrial Group's Debt?

As you can see below, at the end of March 2024, Sichuan Yahua Industrial Group had CN¥1.90b of debt, up from CN¥880.2m a year ago. Click the image for more detail. But it also has CN¥4.67b in cash to offset that, meaning it has CN¥2.77b net cash.

How Strong Is Sichuan Yahua Industrial Group's Balance Sheet?

According to the last reported balance sheet, Sichuan Yahua Industrial Group had liabilities of CN¥3.11b due within 12 months, and liabilities of CN¥787.0m due beyond 12 months. Offsetting this, it had CN¥4.67b in cash and CN¥2.31b in receivables that were due within 12 months. So it can boast CN¥3.08b more liquid assets than total liabilities.

This surplus strongly suggests that Sichuan Yahua Industrial Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sichuan Yahua Industrial Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sichuan Yahua Industrial Group'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.

In the last year Sichuan Yahua Industrial Group had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥11b. To be frank that doesn't bode well.

So How Risky Is Sichuan Yahua Industrial Group?

Although Sichuan Yahua Industrial Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥494m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Sichuan Yahua Industrial Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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