Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Yangzijiang Shipbuilding (Holdings) Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Yangzijiang Shipbuilding (Holdings) had CN¥6.05b of debt, an increase on CN¥5.06b, over one year. However, its balance sheet shows it holds CN¥22.3b in cash, so it actually has CN¥16.2b net cash.

A Look At Yangzijiang Shipbuilding (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥19.7b due within 12 months and liabilities of CN¥3.29b due beyond that. Offsetting this, it had CN¥22.3b in cash and CN¥6.23b in receivables that were due within 12 months. So it actually has CN¥5.49b more liquid assets than total liabilities.

This surplus suggests that Yangzijiang Shipbuilding (Holdings) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Yangzijiang Shipbuilding (Holdings) grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yangzijiang Shipbuilding (Holdings)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yangzijiang Shipbuilding (Holdings) 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. Happily for any shareholders, Yangzijiang Shipbuilding (Holdings) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥16.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in CN¥12b. So we don't think Yangzijiang Shipbuilding (Holdings)'s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Yangzijiang Shipbuilding (Holdings), you may well want to click here to check an interactive graph of its earnings per share history.

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.