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 note that Yunkang Group Limited (HKG:2325) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Yunkang Group's Debt?

As you can see below, at the end of June 2024, Yunkang Group had CN¥1.15b of debt, up from CN¥918.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.70b in cash, leading to a CN¥554.8m net cash position.

How Healthy Is Yunkang Group's Balance Sheet?

We can see from the most recent balance sheet that Yunkang Group had liabilities of CN¥1.95b falling due within a year, and liabilities of CN¥191.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.70b as well as receivables valued at CN¥1.36b due within 12 months. So it actually has CN¥918.7m more liquid assets than total liabilities.

This excess liquidity suggests that Yunkang Group 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 Yunkang 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 ultimately the future profitability of the business will decide if Yunkang Group can strengthen its balance sheet over time. 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 Yunkang Group had a loss before interest and tax, and actually shrunk its revenue by 72%, to CN¥795m. That makes us nervous, to say the least.

So How Risky Is Yunkang Group?

Although Yunkang Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥217m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. For riskier companies like Yunkang 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.