We Think Ling Yun Industrial (SHSE:600480) Can Manage Its Debt With Ease

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. As with many other companies Ling Yun Industrial Corporation Limited (SHSE:600480) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ling Yun Industrial

What Is Ling Yun Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that Ling Yun Industrial had CN¥2.61b of debt in March 2024, down from CN¥2.95b, one year before. However, it does have CN¥3.32b in cash offsetting this, leading to net cash of CN¥712.5m.

How Healthy Is Ling Yun Industrial's Balance Sheet?

According to the last reported balance sheet, Ling Yun Industrial had liabilities of CN¥8.69b due within 12 months, and liabilities of CN¥1.26b due beyond 12 months. Offsetting this, it had CN¥3.32b in cash and CN¥6.35b in receivables that were due within 12 months. So it has liabilities totalling CN¥283.6m more than its cash and near-term receivables, combined.

Of course, Ling Yun Industrial has a market capitalization of CN¥10.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ling Yun Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ling Yun Industrial grew its EBIT by 93% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ling Yun Industrial 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. During the last three years, Ling Yun Industrial generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Ling Yun Industrial's liabilities, but we can be reassured by the fact it has has net cash of CN¥712.5m. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in CN¥932m. So is Ling Yun Industrial's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ling Yun Industrial you should know about.

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.