Stock Analysis
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Ling Yun Industrial Corporation Limited (SHSE:600480) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Ling Yun Industrial
What Is Ling Yun Industrial's Net Debt?
The image below, which you can click on for greater detail, shows that Ling Yun Industrial had debt of CN¥2.61b at the end of March 2024, a reduction from CN¥2.95b over a year. But it also has CN¥3.32b in cash to offset that, meaning it has CN¥712.5m net cash.
How Healthy Is Ling Yun Industrial's Balance Sheet?
We can see from the most recent balance sheet that Ling Yun Industrial had liabilities of CN¥8.69b falling due within a year, and liabilities of CN¥1.26b due beyond that. On the other hand, it had cash of CN¥3.32b and CN¥6.35b worth of receivables due within a year. So it has liabilities totalling CN¥283.6m more than its cash and near-term receivables, combined.
Since publicly traded Ling Yun Industrial shares are worth a total of CN¥7.99b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Ling Yun Industrial also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Ling Yun Industrial grew its EBIT by 77% 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 Ling Yun Industrial'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ling Yun Industrial 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. Over the last three years, Ling Yun Industrial actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Ling Yun Industrial has CN¥712.5m in net cash. And it impressed us with free cash flow of CN¥932m, being 103% of its EBIT. So we don't think Ling Yun Industrial's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Ling Yun Industrial that you should be aware of before investing here.
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.
About SHSE:600480
Ling Yun Industrial
Engages in the production and sale of metal, automotive plastic, and plastic piping systems in China.